A partnership* is a legal relationship between two or more persons carrying on business with a view to profit (Partnerships Act, R.S.O. 1990, c. P.5 [the “Act”], s. 2). Each member of the partnership, whether an individual or a corporation, is called a “partner”. Similar to a sole proprietorship, partners carry on business in their own right.
Elements of a Partnership
There are three criteria that must be satisfied. First, there must be a “business”. Pursuant to the Act, a “business” includes every trade, occupation and profession (s. 1). Most commercial activities will constitute a business. Second, there must be “a view to profit”. Accordingly, the objective cannot be charitable, social or cultural. Third, there must be an agreement to go into business together with a view to sharing the profits. A formal partnership agreement is not required.
Section 3 of the Act set out rules for determining the existence of a partnership, including, but not limited to, control over the business; participation in management; sharing of profits; and responsibility for losses.
Partnership Agreements
It is not always easy to determine whether a partnership relationship exists between the parties. A partnership agreement is not a mandatory, as parties can rely on the provisions of the Act. However, having an agreement in place can provide parties the ability to choose how to deal with their rights and obligations with one another. For example, sections 20 to 31 of the Act provide default rules with respect to the relationship of partners between one another. However, the skeleton nature of the provisions may not be adequate for your partnership.
No Separate Legal Existence
Contrary to a corporation, a partnership is not a legal entity and does not have separate legal existence from the partners who compose it. Each partner is an agent of the partnership and of the other partners for the purpose of the business of the partnership (s. 6). A partner will not bind the partnership when it is apparent that the partner is not acting within the scope of the partnership’s normal business activities, or when the third party is aware that the partner has no authority to act for the partnership in the specific matter. The partners can agree to restrict the power of any one of the partners, and anything that is done in contravention of the agreement will not bind the partnership with respect to persons who have notice of the agreement (s. 9).
Liability
Each partner is jointly liable for all liabilities and obligations of the partnership, while a partner. If a partner dies, the partner’s estate is severally liable for the partnership obligations if they remain unsatisfied, subject to prior payment of his or her separate debts (s. 10). A partner is liable for the debts and obligations that incur during their time as a partner. Generally speaking, a partner will not be liable for debts and obligations that incurred before they became a partner (s. 18(1)), or that arose after they ceased to be a partner (s. 18(3)). A retiring partner should remember to give notice regarding retirement (s. 36).
Dissolution of General Partnerships
Unless the partnership agreement provides otherwise, a partnership will dissolve based on the following:
on the expiration of the term fixed for its existence;
at the termination of the single adventure or undertaking for which it was entered into;
if entered into for an undefined term, by a partner giving notice to the other partner(s) of the partner’s intention to dissolve the partnership on the date mentioned in the notice or on the date of the notice’s communication (if no notice is given); or
by the death or insolvency of a partner.
Registration
The only filing requirement for a general partnership is under the Business Names Act. Partnerships must file Form 5 in order to conduct business and identify itself in Ontario. The only exception to this requirement, and where a filing is not required, is where a partnership uses a name that is composed of the names of the partners of the partnership. Note that failure to file will constitute an offence under the BNA and will also render the partnership and each partner incapable of maintaining a proceeding in Ontario court, except with leave of the court.
Depending on your business needs, a partnership can be an ideal structure to conduct business. It allows for flexibility and affordability. Before jumping into a partnership, it is always wise to review the proposed arrangement with your legal and financial advisors.
Contemplating a partnership? Get in touch with us.
*This post provides a brief summary of general partnerships under the Partnerships Act, R.S.O., 1990, c. P.5. and does not cover limited liability partnerships or limited partnerships.
This publication is not intended to constitute legal advice. No one should act on it or refrain from acting on it without consulting with a lawyer. Jaswal Law would be pleased to provide additional details or advice about specific situations if desired. No part of this publication may be reproduced without the prior written permission of Jaswal Law.