by: Peter Cusimano, B.Sc., LL.B.; Toronto Business Lawyer
A "partnership" exists when two or more persons (individuals or corporations) carry on business in common with a view to a profit. The members of a partnership are called "partners". A partnership is like a sole proprietorship except that instead of one proprietor, there are many proprietors. However, the existence of more than one proprietor creates many complications. The persons who are partners are referred to collectively as a "firm", and the name which the business is carried on is called the "firm name" or "partnership name". Common examples of partnerships are lawyers and accountants. Hence, the terms "law firm" and "accounting firm". However, many small businesses also use this method of carrying on business. In addition, there are many tax advantages of using a partnership.
(i) Legal Status
A cardinal principle in partnerships is that the law imposes on each partner a duty to act at all times towards the other partners in a loyal manner and in good faith. This principle is referred to as a "fiduciary duty". The effect of a partner's fiduciary duty is that the partner is not allowed to take advantage of business opportunities or information obtained while a partner for his/her own personal use without the prior permission of the other partners. In addition, a partner cannot carry on a separate business in competition with the partnership without the consent of the other partners.
Partners carrying on business can sue or be sued in the firm name. In addition, a person cannot be both a partner and an employee of the partnership. Each partner is an agent of the partnership and of the other partners when acting in the normal course of business of the partnership or in what reasonably appears to be so. Therefore, one partner's action will bind all of the partners. As a result, each partner is personally liable to liabilities, debts, and obligations as a result of the actions of the other partners, regardless of the proportionate capital contribution of the individual parties. Anyone obtaining judgment against the partnership can collect from any of the partners (usually the one with the most money). As such it is vital in choosing a partner that you trust and are familiar and comfortable with their business practices and ideas.
Property contributed by the partners to the business and property purchased by the partnership is called "partnership property" and is owned by the partnership.
The Partnership Act contains provisions that governs the relationship of the partners to each other. These provisions can be varied by agreement of all the partners which may be in writing or inferred from a course of dealing. Although most new partners believe that they were meant for each other and they'll always get along, situations will almost always arise that the partners have not contemplated. If there is not a method in place for dealing with the situation and it cannot be resolved then the partnership will be in jeopardy. Therefore, it is strongly recommended that partners enter into a written agreement among themselves (called a "partnership agreement") which outlines the duties and responsibilities of the partners, methods of making decisions, and dissolution of the partnership. The result is a greater trust among partners.
(ii) Partnership Registration
Persons carrying on business as a partnership must register the partnership name under the Business Names Act (unless the partnership is a limited partnership in which case it must be registered under the Limited Partnerships Act). The registration lists the name and address of each partner, the partnership name, the first date of use of the partnership.
However, it is important to note that you may be deemed to be in partnership with someone else even though you have not formally registered the partnership and as such you would be personally liable for the actions of the other "partner".
(iii) Dissolution of the Partnership
Unless there is a written agreement (a "partnership agreement") outlining the circumstances whereby the partnership will come to an end, a partnership will automatically terminate:
- on the expiration of the term fixed for its existence;
- at the completion/termination of the single adventure or undertaking for which it was created;
- upon any partner giving notice to the other partners of his/her intention to dissolve the partnership;
- upon the death or insolvency of any partner; or
- when ordered by a court to do so pursuant to certain circumstances under the Partnership Act.
Revised: November 11, 2015.
©Peter Cusimano, 1995-2019. (www.cusimano.com)