Nicolas Guevara-Mann | Queen’s Business Law Clinic | October 2021
Editor: Mikela Page
In Ontario, partnerships are governed by the Partnerships Act and, if entered into, a partnership agreement. A partnership may be created by natural persons, corporations, or a combination of both.
They are formed when the partners sign a partnership agreement but can also arise implicitly (and sometimes accidentally) when two or more people carry on business with a view to profit. Partners who exert control over a partnership’s operations are known as general partners, while partners who are not interested in the control or management of the partnership are known as silent partners. A person does not need to exert any control over the business to be considered a partner. In general, receiving a share of the profits in the business, without evidence to the contrary, will serve as proof that the person is a partner of the business. Both general and silent partners are equally liable for any debts against the partnership (provided there is no separate arrangement set out within a partnership agreement).
Like sole proprietorships, partnerships have no separate legal personality. Actions that require a legal personality, such as holding property and entering into contracts, must be done by a partner personally on behalf of the partnership.
All partners are in an agency relationship with one another. This means that partners can be bound by contracts entered into by another partner. Partners will also be personally liable for all the debts of the partnership, including debts that were incurred by another partner.
Partners are paid by the distribution of the business’ profits. All profits and losses that occur in the partnership will “flow through” the partnership and are reported on the partner’s personal income taxes, allowing partners to use business losses to offset income from other sources.
Unlike corporations, partnerships do not have a perpetual existence. This means that, absent a properly drafted partnership agreement, a new partnership is formed every time a partner leaves or joins the partnership. If the founders of a corporation pass away, on the other hand, the corporation itself will remain fully functional. Further, partnerships are not able to utilize equity financing by issuing shares for money. All debt borrowed by a partnership will be considered a personal loan of the partners, individually and collectively.
Partnerships are relatively easy and inexpensive to form. However, they can be formed inadvertently if a relationship exists where two or more persons are carrying on business with a view to profit, thus exposing all partners to the legal consequences of a partnership. Having a partnership agreement is beneficial for outlining partners’ duties and obligations, but also for tailoring the business relationship to reflect the business’ needs. It is important to understand the benefits and consequences of forming a partnership before choosing to operate using this business vehicle.
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