Partnership

A partnership is the relationship that subsists between persons carrying on a business in common with a view to profit. This definition, derived from the English Partnership Act, 1890, is adopted in the partnership statutes of every common-law province and territory (in Ontario, section 2 of the Partnerships Act, R.S.O. 1990, c. P.5). In Quebec, partnerships are governed by the Civil Code of Québec. A partnership is not a legal person separate from its partners in the common-law provinces, although it may sue and be sued in the firm name and is treated as a separate person for certain tax purposes, including GST/HST registration and the computation of income.

ESTABLISHING WHETHER A PARTNERSHIP EXISTS

A partnership may arise by conduct, without any written agreement and without registration, where the statutory elements are present. The courts consider the following indicators:

• Carrying on a business: an ongoing commercial activity, as distinct from the mere co-ownership of property.

• In common: the parties act together, sharing in the control or management of the business.

• With a view to profit: the business is conducted with the intention of earning profit, whether or not profit is achieved.

• The sharing of gross returns, or co-ownership of property, does not of itself create a partnership. The receipt of a share of net profits is prima facie evidence of partnership, subject to statutory exceptions, such as remuneration of employees or repayment of loans by reference to profits.

• The parties' written intentions, the contribution of capital and skill, joint bank accounts, the holding out of the parties as partners, and the filing of partnership returns are relevant but not conclusive.

FORMS OF PARTNERSHIP

General partnership

• Every partner participates in management and is an agent of the firm for the purpose of its business; acts of a partner within the usual course of business bind the firm and the other partners.

• Each partner is liable jointly with the other partners for all debts and obligations of the firm incurred while a partner, and jointly and severally for wrongful acts and omissions of a partner acting in the ordinary course of business.

• Liability is unlimited and extends to personal assets.

Limited partnership (LP)

• Created only by compliance with the applicable limited partnerships statute (in Ontario, the Limited Partnerships Act, R.S.O. 1990, c. L.16), including the filing of a declaration with the provincial registry.

• Must have at least one general partner, who manages the business and bears unlimited liability, and one or more limited partners.

• A limited partner's liability is limited to the amount contributed or agreed to be contributed, provided that the limited partner does not take part in the control of the business. A limited partner who participates in control may become liable as a general partner.

• The general partner is commonly a corporation, so that the practical liability of the individuals behind it is limited.

• Limited partnerships are used extensively in real estate, resource, investment fund, and tax-structured arrangements.

Limited liability partnership (LLP)

• A general partnership registered as an LLP under the applicable statute, available only to prescribed professions where the governing professional body permits it.

• In Ontario, LLPs are available to lawyers, chartered professional accountants, and other professions authorised by their governing legislation; the firm name must contain the words limited liability partnership or LLP.

• A partner is not personally liable for the negligent acts or omissions of another partner or of an employee under another partner's supervision, but remains liable for the partner's own negligence and for that of persons under the partner's direct supervision.

• The scope of the liability shield varies by province: some jurisdictions (such as Ontario) protect partners against most partnership obligations other than their own negligence, while others protect only against professional negligence claims.

Quebec forms (Civil Code of Québec)

• General partnership (société en nom collectif).

• Limited partnership (société en commandite).

• Undeclared partnership (société en participation), which arises where no declaration of registration is filed.

• General and limited partnerships must file a declaration with the Registraire des entreprises du Québec.

THE PARTNERSHIP AGREEMENT

In the absence of agreement, the statutory default rules apply, including equal sharing of capital and profits, the right of every partner to participate in management, the requirement of unanimous consent to admit a new partner or change the nature of the business, and dissolution on the death, bankruptcy, or notice of any partner. A written partnership agreement is therefore essential and ordinarily addresses:

• Name, purpose, place of business, and commencement date of the partnership.

• Capital contributions of each partner, the treatment of additional contributions, and interest on capital.

• Allocation of profits and losses, including any salaries or guaranteed payments to partners, and the method of allocation for income tax purposes.

• Drawings policy and limits.

• Management authority, voting thresholds, signing authority, and matters reserved for unanimous approval.

• Duties of partners, time commitment, restrictive covenants, and confidentiality.

• Admission of new partners, voluntary withdrawal, retirement, expulsion, and the consequences of death, disability, or insolvency of a partner.

• Valuation and buy-sell provisions, including the formula for determining the value of a departing partner's interest and the payment terms.

• Fiscal year-end, books and records, banking arrangements, and the appointment of accountants.

• Dispute resolution, including mediation or arbitration.

• Dissolution and winding-up procedures.

DUTIES AND RIGHTS OF PARTNERS

• Fiduciary duty: partners owe each other a duty of utmost good faith and must render true accounts and full information on all matters affecting the partnership.

• Duty to account for any benefit derived without the consent of the other partners from any transaction concerning the partnership or from use of partnership property, name, or business connection.

• Duty not to compete with the firm without consent.

• Right to inspect and copy the partnership books, which are kept at the principal place of business.

• Right to indemnity for payments made and liabilities incurred in the ordinary and proper conduct of the business.

REGISTRATION REQUIREMENTS BY PROVINCE AND TERRITORY

A general partnership operating under a name other than the names of the partners must register the firm name in each jurisdiction in which it carries on business. Limited partnerships must file a declaration or certificate to be constituted. Registration is renewable periodically in several jurisdictions (every five years in Ontario).

• Newfoundland and Labrador: Registry of Companies and Deeds (Partnership Act; Limited Partnership Act).

• Prince Edward Island: Corporate and Business Services (Partnership Act).

• Nova Scotia: Registry of Joint Stock Companies (Partnerships and Business Names Registration Act; Limited Partnerships Act).

• New Brunswick: Service New Brunswick, Corporate Registry (Partnerships and Business Names Registration Act; Limited Partnership Act).

• Quebec: Registraire des entreprises du Québec (Civil Code of Québec; Act respecting the legal publicity of enterprises). Registration and an annual updating declaration are mandatory for general and limited partnerships.

• Ontario: Ontario Business Registry (Business Names Act; Partnerships Act; Limited Partnerships Act). Registration of a business name is valid for five years.

• Manitoba: Companies Office (Partnership Act; Business Names Registration Act).

• Saskatchewan: Information Services Corporation, Corporate Registry (The Partnership Act; The Business Names Registration Act).

• Alberta: Corporate Registry, through authorised registry agents (Partnership Act).

• British Columbia: BC Registries and Online Services (Partnership Act).

• Yukon: Corporate Affairs (Partnership and Business Names Act).

• Northwest Territories: Corporate Registries (Partnership Act).

• Nunavut: Legal Registries (Partnership Act).

DISSOLUTION

• By expiry of a fixed term or completion of the undertaking for which the partnership was formed.

• By notice of any partner, in a partnership at will.

• By the death or insolvency of a partner, unless the agreement provides otherwise.

• By the business becoming unlawful.

• By order of the court on grounds such as incapacity, misconduct, persistent breach of the agreement, or where it is just and equitable.

• On dissolution, partnership assets are applied first to pay creditors, then to repay advances by partners, then to repay capital, with any residue shared in the profit-sharing ratio. Former partners remain liable for obligations incurred before dissolution, and notice of retirement must be published or given to avoid continuing liability to persons who dealt with the firm.

RELATED PAGES

• Partnership: Bookkeeping, for partners' capital accounts, income allocation, admission and withdrawal entries, and financial statements.

• Partnership: Payroll, for the treatment of partner drawings and the payroll obligations for employees of the firm.

• Partnership: Tax, for the computation and allocation of partnership income, Form T5013, the at-risk rules, and GST/HST.

SOURCES

• Partnerships Act, R.S.O. 1990, c. P.5; Limited Partnerships Act, R.S.O. 1990, c. L.16; Business Names Act, R.S.O. 1990, c. B.17.

• Civil Code of Québec, arts. 2186 to 2266.

• Partnership statutes of each province and territory, as listed above.

• Canada Revenue Agency, Guide T4068 Guide for the Partnership Information Return (T5013 Forms).