The partnership primer – is partnering the right business move?

Partnership is a foundational element of the law of business organization. To understand a partnership, you have to consider four simple and foundational questions:

When does the partnership exist?

In Ontario the Partnerships Act establishes the basic rules of partnerships. Other provinces and territories have their own partnership regulations, but the principles are usually much the same as Ontario’s. The Partnerships Act defines partnerships as “the relation that subsists between persons carrying on a business in common with a view to profit”. So a few elements must be present for a partnership to exist:

  1. More than one person must be…
  2. In a relationship with each other that involves…
  3. Carrying on a business together…
  4. With a view to making profit.

This definition is based on the intention of parties, as disclosed by the circumstances. Did two people intend to carry on a business together with a view to making profit? If they did, a partnership will have been created.

The extent of each person’s investment in or, control of the partnership business will not define whether or not the partnership exists.

What is the legal status of the partnership?

A pig carries a bird on its head.

Partnerships can provide an opportunity for people with diverse skillsets to work together… but they are not without risk.

A partnership is not recognized as a separate legal entity. It is not legally distinct from the partners that form it. This means…

  1. Each partner is liable to the full extent of their personal assets for the debts and liabilities of the partnership. This means that if the partnership owes money to a creditor, the creditor can enforce that debt against the personal assets of any partner, not just the assets of the partnership.
  2. A partner cannot be recognized as an employee of the partnership business. This because no person can enter into a contract with themselves. Because a partnership has no legal existence distinct from the individual partners, it is not possible to be an employee and partner at one firm at the same time because it would involve employing yourself.
  3. Except in very particular circumstances provided for in the Partnerships Act, a partner can’t be a creditor of their partnership. Again, this is because it isn’t legally possible to contract with yourself, and this includes contracts to lend money.

What are the rights and responsibilities of the partners?

Under the Partnerships Act, there are eight key rights and responsibilities of partners. These rights and responsibilities emanate from the basic assumption that the partners are equal with respect to their capital contributions, rights to participate in the management of the business and rights to share in the profits of the business.

  1. All partners are entitled to share equally in the capital and profits of the business. They therefore have the responsibility to contribute equally to the losses sustained by the partnership.
  2. Every partner is entitled to take part in the management of the partnership business.
  3. New partners may not be added to the partnership without the consent of all the existing partners.
  4. Changes to the nature of the partnership may not be made without the consent of all the existing partners.
  5. A partner cannot be removed from the partnership without their consent.
  6. A partner is jointly liable with other partners for all debts and obligations of the firm as long as they are a partner.
  7. A partner is an agent of the partnership. This means that they can bind the firm and the other partners when acting in the course of their duties.
  8. As an extension of their agency, each partner owes a “fiduciary duty” – and duty of good faith – to all other partners.

What are the terms of the partnership?

The rights and responsibilities of a partner as set out above are the baseline rule established by the Partnerships Act. However, one of the most important elements of the law of partnership is that a partnership is a contractual relationship. Partnerships can be as varied as the people who are partners – partners can contract their particular rights and responsibilities, which can be different from the baseline rights and responsibilities established in the Partnerships Act. However, where a partnership contract is silent on a particular issue, the Partnerships Act’s terms for that issue will be implied.

– Isabelle Crew (3L, Faculty of Law, Queen’s University)