A partnership occurs when two or more people decide they are going to work together in a business.
Types of Partnerships
There are three types in Canada.
- General Partnerships A general partnership occurs when all individuals have equal control over the business and make decisions together.
- Limited Partnerships This type occurs when one partner decides to agree to be a partner, and in most cases provide some funding to the business, but does not wish to be part of the day to day operations. His input is considered to be limited. It can be formed with one general partner and one limited partner.
- Limited Liability Partnerships This type provides that the partners are not responsible for the debts, obligations, or liabilities of the business resulting from the actions or negligence of another partner, employee or agent of the business. Lawyers and accountants generally form LLPs.
Is There Any Limit on the Number of Partners
No, there is no limit. A limited partnership would have to have at least one limited partner and one general partner however it could have as many of each as it wishes.
A general partnership must have at least two general partners and can have as many general partners as it wishes but it would not have any limited partners.
Do I Need a NUANS Name Search to Register
In some provinces and territories you will be required to provide a NUANS Name Search report or similar report to register. In Ontario and Alberta this is not required but it is recommended.
Should You do a Preliminary Name Search for the Name
Yes, you should. It is very important that you ensure that the name you are choosing for your business is not similar or the same as any other name already registered.
Even if the name is exactly the same, except for the ending of the name in the case of a corporation, you should still not use the name. An example of this would be if you were to register a partnership called “Johnson Partners” and there was already a name called “Johnson Partners Ltd.’
In some jurisdictions the government would allow you to do such a registration but it would not be a good idea since it is a conflict and Johnson Partners Ltd. might not be too pleased with your choice and could take you to court in an attempt to have it changed if it is a company that is highly placed in the marketplace. Your proposed partnership name should be as distinct and different from all other business names, partnerships, sole proprietorships, trade-marks or companies as possible.
Can Companies be Partners of a Partnership
Absolutely. Sometimes two or more companies will decide to form a partnership.
All corporate partners must be registered in the province where the partnership is formed.
If they were registered in another province then they must first be extra-provincially registered in the province where the business will be formed. Each company will be given a corporate registration no. in that province which will be required in order to register the partnership with those corporate partners.
What Information is Required to Register
The following information is required; 1) The name of the partnership 2) The province or territory where the partnership is to be situate 3) The business address of the partnership 4) The mailing address of the partnership (which can be the same) 5) The name and home address of each partner 6) The purpose or nature of business of the partnership 7) If any partner is a company then the company’s corporate number.
What are the Advantages
They are easy to form and low on start up costs. Each partner will bring his or her own skill set to the business. One partner will have skills in some areas and another in other areas which can result in broader management knowledge and the ability to diversify tasks and responsibilities. More than one viewpoint can result in more effective decision making.
Partners pay taxes on business profits and deduct losses on their individual tax returns.
Percentages of profit and loss of each particular partner can be different percentages. A partner would share in the profits of the partnership in proportion to his or her percentage of investment. However, keep in mind that a partnership agreement must be in place to vary the profits. If there is no agreement each partner shares the profits and losses equally.
When a partnership is formed the partners pool their personal assets and therefore the business partnership may need less funding than a sole proprietorship. See sole proprietorships for more information.
It is also easier to borrow from lending resources when more than one person is obligated to repay the loan. There is little government regulation for partnerships.
What are the Disadvantages
Each partner is liable for all of the business’s debts and obligations, even those incurred by one partner without the knowledge or authorization of other partners. If one partner is sued then the other partners in the business are equally responsible for any financial judgment imposed by a court.
Unlike a corporation, which is considered an entity on its own, partners are liable personally for any debts to the business. Partners are responsible for each of the other partner’s actions. Each partner is deemed to know any information that has been given to another partner. Therefore partners must be able to trust each other to reveal all pertinent information.
If there is no agreement in place, the business is dissolved upon the death or withdrawal of any partner or the acceptance of a new partner. An agreement may be entered into with clauses therein which provide that the surviving partners may purchase the interests of the deceased or withdrawing partner. See below for more information about these agreements.
Profits must be shared by all partners equally unless an agreement is in place to provide different percentages for different partners who invest more or less into the business.
If a partner, without the consent of the other partners, carries on a business of the same nature and he or she is competing with that of the partnership, the partner must account for and pay over to the firm all profits made by the partner in that business.
A partnership is a relationship between persons who are carrying on business in common with a view to a profit, whether or not the partners term their common business a partnership. Evidence of a partnership includes joint tenancy, sharing of gross returns and receipt of a share of profits. Relationships that were not intended to be partnerships may later be deemed as such and therefore you should be careful to clearly define your business relationships.
What are the Advantages of a Limited Partnership
Limited partners in a limited partnership are not liable for acts of the firm. If a limited partner can be shown to have taken part in the management of the business he or she may be deemed a general partner and would then lose his or her liability protection.
What are the Disadvantages of a Limited Partnership
Limited partnerships must comply with the regulatory requirements of the Limited Partnership Acts in the province or territory where the limited partnership was formed and as such must provide certain notices to the government and maintain certain records. A limited partner does not have any right to take part in management and therefore that person has little control over his or her investment in the business. It is more expensive to register a this type of business.
Should I Have a Partnership Agreement
Yes, you should have a partnership agreement. When one partner decides to leave a partnership the partnership is automatically dissolved unless a partnership agreement has been signed saying otherwise. If the business is viable the remaining partners might not wish to dissolve the business. Also, in cases of disputes, it is a good idea to have some clauses in your partnership agreement to cover possible situations that may arise. If you do not have an agreement in place then the Partnership Act of the particular province or territory in which the partnership was formed must be followed and in most cases the statute remedies are narrow. No matter how long you have known the person whom you decide to go into partnership with, including your spouse, you should still form an agreement.
The registrations usually have an expiry date which can be three to five years. You will need to take note of this after registration because the government will not remind you of the renewal date.
Some provinces will also have a requirement of yearly annual return filings. These are filings required by the Companies Branches rather than the tax department. These annual returns must be filed or the partnership will be dissolved.
Do I Need a Solicitor to Prepare the Agreement
Yes, your best option would be to have a partnership agreement drafted by a solicitor and each party to the agreement should have independent counsel.
This is to ensure that each party is protected from any changes occurring in the business such as a death, resignation, sickness, disagreements, etc. and also to determine in writing how the financial aspects of the business will be managed. Without a well drafted agreement you could be opening yourself up to a problem in the future which could cost you a loss of income if you have not provided for a agreement with proper provisions.
Independent advice is especially important since a solicitor will look at the agreement from your personal view and insist on adding clauses to protect you in the future for any number of situations occurring.