IS IT TIME TO FORM A PARTNERSHIP?
by Rob Galloway
Starting a business can be a daunting task. There are many questions which need to be answered and procedures that must be put in place. But before you can move forward setting up your business, you must first decide what form of business organization and structure suits your needs and allows you to flourish. Where you and a group of likeminded individuals are beginning your endeavour together, you will likely choose to either form a partnership or incorporate your business. This paper will discuss partnerships; how they are formed and the advantages and disadvantages of operating your organization as a partnership.
Partnerships are a basic form of business organization founded on a relationship of trust. Like all business structures, there are advantages and disadvantages to creating a partnership, including:
- Simple to start up. Lack of formality in creating your partnership.
- Preferential tax benefits. In the early stages of the business where income is low or there are losses, the partners of the partnership can include your share of the partnership in your individual tax returns.
- Share in costs, profits, losses, management, and assets. Partners can share early start-up costs and losses such that they do not bear the entire burden themselves.
- Unlike corporations, partnerships are not legal entities. As such, partners cannot hide behind the partnership to protect themselves from liability. Your personal assets can be used to satisfy business debts.
- Each partner is an agent for all other partners and the partnership in matters regarding the partnership business. As such, each partner is unlimitedly liable for the debts and obligations of the partnership and its partners.
- You are bound by the decisions of the other partners.
One of the most appealing features of a partnership is its flexibility and ease of creation. Legislation and common law have created a series of default rules which govern partnerships, but these rules to not implement any formal steps in forming a partnerships, nor do they require the partners to enter into a contract or register the partnership under the provincial legislation (Partnership Act).
Although not required by law to enter into a partnership agreement, it is in the best interests of all involved parties to draft a contract to establish the terms of your business and protect yourself in the case of disagreements or dissolution of the partnership. Typically, the partners will ensure that the terms, structure, management, rights, and obligations of a partnership are all determined and defined through an agreement. These terms include, but are not limited to how profits and losses are to be distributed, how the partnership is dissolved, and prohibited contracts and actions.
Where no agreement exists, the terms of the provincial partnership statute govern the partnership and act as template partnership agreement. In the absence of a written agreement, partners are bound to the provisions in the partnership statute. These provisions are not a complete code though and individuals are permitted to vary and amend the rights and duties of the parties. Additionally, the rules of equity and common law pertaining to partnerships apply so long they are not inconsistent with the legislation.
A partnership may arise as soon as two or more individuals start business activities and can be established even where the parties do not have a formal written contract. The Partnership Act sets out the factors in determining whether a partnership relationship exists. A partnership is defined as “the relation that subsists between persons carrying on a business in common with a view to profit….” Based on this definition, there are four criteria which must be satisfied for a partnership to subsist. When making such a determination, these elements are considered in the context of the facts and circumstances surrounding each potential partnership association and the intentions of the parties involved.
- A Partnership is a Relationship between Persons
“Person”, in law, is defined to include “a corporation and the heirs, executors, administrators or other legal representatives of a person to whom the context can apply according to the law.” As such, partnerships can be comprised of corporations in addition to natural persons. Although corporations are permitted to be members of a partnership, other partnerships, at least in Ontario, are not permitted to act as a partner in a partnership.
- Carrying on Business
“Business” is defined to include “every trade, occupation, or profession.” Whether or not a group of individuals forms a partnership is dependent on whether the intention of the parties was to carry on a business, trade, occupation, profession, or some other operation.
- In Common
Although “in common” suggests that partners must be carrying on business together, certain precedent has determined that an individual or corporation could be a partner without having to actively participate in the partnership or exert control over the business. Factors such as:
- contributions of knowledge, assets, or skill to a common undertaking;
- a joint property interest with respect to the business venture;
- sharing in the profits, losses, responsibilities, obligations, and liabilities;
- presence of joint bank accounts, filing partnership tax returns, and other joint financial documents;
- correspondence with third parties making referring to directly or making allusions to a partnership.
illustrate the intention of individuals to act “in common” and form a partnership.
- With a View to Profit
The final element prevents non-profit organizations, as well as those businesses with a social or cultural object from becoming partnerships. Although the element insists that he partners operate with a “view to profit”, no actual profits have to be made for a legal partnership to form.
Whether you decide to operate as a partnership or corporation, you should seek the assistance and guidance of a lawyer to aid in the selection of the organizational structure which best suits your needs and to assist in drafting all necessary documentation to protect your interests, establish the terms of your business, and meet all legal requirements.
As a part of the Lancaster Brooks & Welch Corporate and Commercial team, Rob Galloway can assist you in all aspects of your business legal needs. He may be contacted at 905-641-1551.