Nicolas Guevara-Mann | Queen’s Business Law Clinic | October 2021
Editor: Mikela Page
As noted in last week’s blog, partnerships can exist with or without a partnership agreement. However, having a partnership agreement serves several important functions: It provides certainty that a partnership does in fact exist and it allows the partners to deviate from the default partnership rules that are outlined in the Partnerships Act.
By default, all partners must equally share the profits of the business. A partnership agreement can vary this default rule so that each party receives a different division of income (for example, a 50/30/20 split). Other default rules that can be renegotiated through a partnership agreement include:
At the same time, there are mandatory rules that cannot be altered by way of a partnership agreement. A partnership agreement strictly governs the relationship between partners and not the partnership’s relationship with third parties. Thus, the agency relationship between partners cannot be disposed of. This means partners will always be able to bind each other to contracts with third parties and all partners will be jointly liable for the debts, obligations, and liabilities of another partner. While a partnership agreement may split the losses of the partnership in the manner agreed upon by the partners, a third party seeking to recover its debt from the partnership or from an individual partner enjoys this benefit of joint liability. The third party will be able to choose to recover from one or all the partners personally to recover their money.
Similarly, partnership agreements cannot protect the partnership from third party tort liability.
The QBLC can assist you in drafting a partnership agreement and help you tailor the rules of the partnership to your specific circumstances.
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