A partnership is created where two or more persons carry on business together with a view to a profit. There are mainly two types of partnerships – general (or ordinary) and limited.
Registering a General Partnership
If the general partners do not have a specific partnership agreement, the provincial partnerships acts govern their relationships. In Ontario, Partnerships Act governs the relationship between general partners. Partnership under the Partnership Act does not include a relationship between two or more companies or associations.
Features of a Partnership
To be a valid partnership, the relationship should fulfill the following three requirements:
- there should be a business;
- the business must be carried on in common between the partner; and
- the common business must be carried on with a view to earning a profit.
Under the Ontario Partnership Act, persons who have entered into partnership with one another are called collectively a firm, and the name under which their business is carried on is called the firm name.
The partnership name must be registered under the Ontario’s Business Names Act.
Like a sole proprietorship, a partnership is not a legal entity separate from the partners. Hence, a partner cannot be an employee or creditor of the partnership. However, a partnership can exist between two firms or between a firm and an individual.
Rights of Partners
The Partnerships Act creates a set of rules for how general partners deal with each other, which may be modified by agreement. Some key rules are:
- Partners share equally in the capital and profits of the partnership and must contribute equally to the losses of the partnership.
- Partner is entitled to be indemnified in respect of payments made or liabilities incurred in the ordinary course of the partnership.
- Each general partner has a right to participate in the management of the partnership.
- If the partners want to change the default rules, they require unanimous consent of all partners.
- A partner must never put his or her personal interest above that of the partnership.
- Partnership property does not belong to any partner individually and a partner who contributes it loses his or her beneficial interest in it.
Liabilities of the Partners
Partners are agents of each other and each partner is liable for debts of the partnership. Upon a partner’s death, the partner’s estate is also separately liable in a due course of administration for such debts and obligations so far as they remain unsatisfied. Any partner can bind the firm and all other partners. But, the partners and the firm are not bound where the partner is acting outside the normal course of the business of the partnership or where a partner does not have authority to act and the person with whom the partner is dealing is aware that the partner lacks authority.
Dissolution of Partnership
In general, a partnership may be dissolved when an event such as insolvency of a partner, court order, or when it becomes unlawful for the partnership to continue. Unless the partnership agreement provides otherwise, a partnership is also dissolved by the death of a partner.
A partnership created for a definite term or objective can be dissolved upon conclusion of said term or upon fulfillment of its objective. An indefinite term partnership can be dissolved by any partner giving notice to the others, of his or her intention to dissolve the partnership. The date of dissolution of partnership is the date mentioned on the notice or in case of undated notice, the date on which notice is communicated.
Benefits of General Partnership
- General partnership is fairly easy and inexpensive to form
- The partners share equally in the management, profits and assets of the business
Drawbacks of General Partnership
- No legal difference between partnership and the partners
- All partners have unlimited liability. Partners’ personal assets can be used to repay the partnership debts
- Partners are held financially responsible for business decisions made by the other partner(s)
- One partner can bind other partner and partnership business
- Partnership can be dissolved upon the death or bankruptcy of a partner
Registering a Limited Partnership
Limited partnerships are specialized vehicles designed to fulfill the needs of investors who want to share in partnership profits but limit their liability for partnership losses. Limited Partnerships are governed by the Limited Partnerships Act, RSO 1990, c. L.16 (“Limited Partnership Act”). A limited partnership may, subject to the Limited Partnerships Act, be formed to carry on any business that a partnership without limited partners may carry on.
Features of Limited Partnership
Limited Partnership is made up of at least one general partner and a limited partner. Limited Partnership does not simply come into existence; a declaration must be filed under the Business Names Act. Additionally, the limited partnership must maintain records pursuant to the requirements of the respective Limited Partnership statue.
Rights of a Limited Partner
A limited partner can provide surety for the limited partnership, examine into the state of the business and provide advice on its management. Limited partner can also act as a contractor, agent or employee of the limited partnership business or for the general partner.
Liabilities of the Partners
A limited partnership, like an ordinary partnership, is not a legal entity. General partner has unlimited liability (similar to a general partner under the Partnerships Act) and the limited partner has limited liability subject to its investment. However, a limited partner cannot manage the partnership. A limited partner loses its limited liability if it takes part in the control of the business or allows its name to be used in the firm name. Limited partners have a right to share in profits and to have their contribution returned and informational rights.
Dissolution of Partnership by the Limited Partner
A limited partner is entitled to have the limited partnership dissolved and its affairs wound up where:
- the limited partner is entitled to the return of the limited partner’s contribution but, upon demand, the contribution is not returned to the limited partner; or
- the other liabilities of the limited partnership have not been paid; or
- the limited partnership assets are insufficient for their payment as required by the Limited Partnerships Act and the limited partner seeking dissolution would otherwise be entitled to the return of the limited partner’s contribution.
Benefits of Limited Partnership
- Limited liability of the limited partner. Partnership debt of limited partner is limited to the investment.
- General partners retain management and control of business.
- Limited partners can be replaced without dissolving limited partnership.
- Investors can be offered investment opportunity without relinquishing control of business by general partners or exposing investors to unlimited liability.
Drawbacks of Limited Partnership
- General partners continue to have unlimited liability.
- A limited partner can bind the partnership if he/she is acting within his/her capacity.
- Limited partner is not entitled to return of his/her contribution unless sufficient property is left in the firm to cover liabilities with creditors.
General partnership is easy to set-up and requires minimal formalities. However, the liability of partners is unlimited and each partner can bind the partnership along with other partners. Limited partnership offers limited liability for investing partner and provides more control to general partners. The liability of general partners is unlimited in limited partnerships and a limited partner’s actions can bind the general partners and the business. As a business entity, partnership is ideal for a small business set up with low investment, provided the partners execute a legally sound partnership agreement.
If you wish to register a partnership business, contact us.