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PARTNERSHIPS: The essentials on a General Partnership.

As partnerships are normally comprised of more than one decision-maker, rules to provide a framework for the relationship between the partners carrying on business together, and to determine the rights of third parties dealing with the partnership, were developed by the courts of common law. Codified in the Partnerships Act, such law provides that the rules of equity and of common law applicable to a partnership continue in force except so far as they are inconsistent with the express provisions of the statute. The basic principles set forth in the Partnerships Act are interpreted by case law.

Formation

The Partnership Act defines a partnership as “the relation that subsists between persons carrying on a business in common with a view to profit,” and provides three criteria:

  1. There must be a “business,” as defined in the Partnerships Act to include “every trade, occupation and profession.” So, a business could be an ongoing activity or any separate commercial transaction, as also its corollary, almost any commercial activity constitutes a business.
  2. The second requirement is that there be “a view to profit.” Should the object of the activity be charitable, social or cultural, it would not be a partnership.
  3. The third condition is an agreement to carry on business in common and to share the profits. It could be in a written contract or an oral agreement, or evident from the conduct of the parties.

Registration

Compliance with the Business Names Act is essential for partnership. The ruling there provides that no persons associated in partnership shall carry on a business or identify themselves to the public unless the name of the partnership is registered by all of the partners, except for a limited partnership carrying on business in accordance with the Limited Partnerships Act, or in the case where the partnership identifies itself or carries on business under a name that is composed of the names of all the partners. A form is there for registration purposes, under the Business Names Act, failure to file which renders the partnership and each partner incapable of maintaining a proceeding in any court in Ontario in connection with the business carried on by the partnership, except with leave of the court. It is also an offence under the Business Names Act.

Characteristics

The Partnerships Act govern the relationship of partners to persons dealing with them by mandatory provisions, which cannot be changed by agreement. Among these stipulations, the following are important:

  1. No separate legal existence – Although the persons who have agreed to be partners are referred to collectively as a firm, and the name under which their business is carried on is called the firm name, a partnership is not a separate legal entity from the partners, which composed it. Taken from the common law, the effect of this doctrine was that lawsuits could only be brought by or against partners; they could not be brought in the name of the firm. This has since been changed by legislation. Rule 8.01 of the Rules of Civil Procedure enables partners carrying on business in Ontario to sue or be sued in the firm name. It also means that a person cannot be both a partner and an employee of the partnership, because no person can enter into a contract with himself or herself;
  2. Agency – When acting in the normal course of partnership business or in what reasonably appears to be so. Therefore, when acting as a partner, one partner’s action binds all the partners following the law of principal and agent;
  3. Liability – Following the agency relationship, each partner in a firm is jointly liable with the other partners to the full extent of his or her personal assets for all debts and obligations of the firm incurred while a partner;
  4. Duty of loyalty and good faith – Owing to the agency relationship between partners and the resulting exposure to seizure of one partner’s individual assets to compensate for liabilities arising from another partner’s actions, the law places each partner under a duty to act at all times towards the other partners loyally and in good faith from the time of negotiating the partnership’s formation until its affairs are finally wound up. Regarded as the cardinal principle of the internal law of partnerships, it is found in the case law but is not stated expressly in the Partnerships Act; and
  5. Partnership property – Given that a partnership is not a separate legal entity from the partners, all property contributed by the partners to the partnership or purchased in the course of the partnership business is called “partnership property”. This property of the partnership is its own and not divisible among the partners, an example of the tendency to view a partnership as a unit for some purposes. A partner’s “right” is a right to a division of profits on the basis agreed upon by the partners, or on an equal basis if there is no other agreement as to how the profits are to be shared. Having paid up all liabilities of the partners, the individual partner is entitled only to the sale and division of the proceeds of partnership property on dissolution of the partnership.

Relationship

Normally, an agreement between the partners governing their relationship provides the terms of a partnership. If there is no such partnership agreement, the terms of the partnership will be determined by the default provisions given in the Partnerships Act.

Dissolution

Certain sections the Partnerships Act deal with the dissolution of the partnership.

  1. When there is no such agreement to the contrary, a partnership is dissolved:
  2. When the term fixed for its existence is over;
  3. At the end of the single adventure or undertaking for which it was entered into;
  4. When entered into for an undefined time, by a partner giving notice to the other partners of his or her intention to dissolve the partnership on the date mentioned in the notice, or, if no date is given, on the date of the notice’s communication; and
  5. Owing to the death or insolvency of a partner.

Setting up a partnership is no easy task.  Making sure you provided for a proper and elaborate partnership agreement is essentially.  Contact the lawyers at Levy Zavet PC when you are ready to talk Partnership!

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