A partnership occurs when two or more people decide they are going to work together in a business and they register a form called a Partnership Registration and, in some cases, enter into a Partnership Agreement. There are three types of partnerships in Canada. A general partnership, a limited partnership and a limited liability partnership.
A general partnership occurs when all individuals have equal control over the partnership and make decisions together.
A limited partnership occurs when one partner decides to agree to be a partner, and in most cases provide some funding to the partnership, but does not wish to be part of the day to day operations. His input is considered to be limited . A limited partnership can be formed with one general partner and one limited partner.
A limited liability partnership is a partnership where the partners are not responsible for the debts, obligations, or liabilities of the partnership resulting from the actions or negligence of another partner, employee or agent of the partnership. Lawyers and accountants generally form limited liability partnerships.
There is no limit to the number of partners in any type of partnership. A limited partnership would have to have at least one limited partner and one general partner however it could have as many of each as it wishes. A general partnership must have at least two general partners and can have as many general partners as it wishes but it would not have any limited partners.
Partnerships fall under the provincial and territorial legislation and a form usually called a Partnership Registration must be completed and filed with the appropriate provincial or territorial government office. You can register the partnership yourself by completing the appropriate form and attending your local provincial or territorial government and in some cases may be able to register online.
In some provinces and territories you will be required to provide a Nuans Name Search report or similar report to register a partnership. In Ontario this is not required. However, regardless you should do a preliminary nuans name search (usually free) to determine if the name is available regardless. It is very important that you ensure that the name you are choosing for your partnership is not similar or the same as any other name already registered. Even if the name is exactly the same, except for the ending of the name in the case of a corporation, you should still not use the name. An example of this would be if you were to register a partnership called Johnson Partners and there was already a name called Johnson Partners Ltd. In some jurisdictions the government would allow you to do such a registration but it would not be a good idea since it is a conflict and Johnson Partners Ltd. might not be too pleased with your choice and could take you to court in an attempt to have it changed if it is a company that is highly placed in the marketplace. Your proposed partnership name should be as distinct and different from all other business names, partnerships, sole proprietorships, trade-marks or companies as possible.
Sometimes two or more companies will decide to form a partnership.
The following information is required to register a partnership:
1) The name of the partnership 2) The province or territory where the partnership is to be situate 3) The business address of the partnership 4) The mailing address of the partnership (which can be the same) 5) The name and home address of each partner 6) The purpose or nature of business of the partnership 7) If any partner is a company then the company's corporate number.
Partnerships are easy to form and low on start up costs. Each partner will bring his or her own skill set to the partnership. One partner will have skills in some areas and another in other areas which can result in broader management knowledge and the ability to diversify tasks and responsibilities. More than one viewpoint can result in more effective decision making.
When a partnership is formed the partners pool their personal assets and therefore the business partnership may need less funding than a sole proprietorship. It is also easier to borrow from lending resources when more than one person is obligated to repay the loan.
There is little government regulation for partnerships. The formation is simple with a partnership registration and there are no yearly filings which keeps the cost of forming and maintaining a partnership low.
In a general partnership each partner is liable for all of the partnership's debts and obligations, even those incurred by one partner without the knowledge or authorization of other partners. If one partner is sued then the other partners in the partnership are equally responsible for any financial judgment imposed by a court. Unlike a corporation, which is considered an entity on its own, partners are liable personally for any debts to the partnership. Partners are responsible for each of the other partner's actions. Each partner is deemed to know any information that has been given to another partner. Therefore partners must be able to trust each other to reveal all pertinent information.
If there is no partnership agreement in place, a partnership is dissolved upon the death or withdrawal of any partner or the acceptance of a new partner. A partnership agreement may be entered into with clauses therein which provide that the surviving partners may purchase the interests of the deceased or withdrawing partner. See below for more information about partnership agreements.
Profits must be shared by all partners equally unless a partnership agreement is in place to provide different percentages for different partners who invest more or less into the partnership.
If a partner, without the consent of the other partners, carries on a business of the same nature and he or she is competing with that of the partnership, the partner must account for and pay over to the firm all profits made by the partner in that business.
A partnership is a relationship between persons who are carrying on business in common with a view to a profit, whether or not the partners term their common business a partnership. Evidence of a partnership includes joint tenancy, sharing of gross returns and receipt of a share of profits. Relationships that were not intended to be partnerships may later be deemed as such and therefore you should be careful to clearly define your business relationships.
Limited partners in a limited partnership are not liable for acts of the firm. If a limited partner can be shown to have taken part in the management of the business he or she may be deemed a general partner and would then lose his or her liability protection.
Limited partnerships must comply with the regulatory requirements of the Limited Partnership Acts in the province or territory where the limited partnership was formed and as such must provide certain notices to the government and maintain certain records.
A limited partner does not have any right to take part in management and therefore that person has little control over his or her investment in the limited partnership.
It is more expensive to register a limited partnership.
You should have a partnership agreement. When one partner decides to leave a partnership the partnership is automatically dissolved unless a partnership agreement has been signed saying otherwise. If the business is viable the remaining partners might not wish to dissolve the business. Also, in cases of disputes, it is a good idea to have some clauses in your partnership agreement to cover possible situations that may arise. If you do not have a partnership agreement in place then the Partnership Act of the particular province or territory in which the partnership was formed must be followed and in most cases the statute remedies are narrow. No matter how long you have known the person whom you decide to go into partnership with, including your spouse, you should still form a partnership agreement.
Your best option would be to have a partnership agreement drafted up by a solicitor and each party to the agreement should have independent counsel. This is to ensure that each party is protected from any changes occurring in the partnership such as a death, resignation, sickness, disagreements, etc. and also to determine in writing how the financial aspects of the business will be managed. Without a well drafted partnership agreement you could be opening yourself up to a problem in the future which could cost you a loss of income if you have not provided for a partnership agreement with proper provisions. Independent advice is especially important since a solicitor will look at the agreement from your personal view and insist on adding clauses to protect you in the future for any number of situations occurring. Law firms operate as partnerships and have a better understanding of the law behind all types of partnerships.
There is no law that says you have to have a lawyer. If you cannot afford a lawyer to draft your partnership agreement ensure that you have read the legislation for partnerships in your particular province or territory and ensure you do have some form of partnership agreement. Also ensure that the agreement has provisions for what happens if a partner becomes ill, wishes to resign or dies as well as providing for the appropriate profit split. Having no partnership agreement would be a bad choice to make.
For more information on this subject go to www.canadianbusinessresources.ca.
Holly Crosgrey is a law clerk and paralegal with over 20 years experience. She is the owner of the website called Resources for Canadian Buisness Owners located at www.canadianbusinessresources.ca which is a site dedicated to providing business owners with information on legal and government requirements.
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