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Understanding the partnership structure pt1: the general partnership.

Partnership refers to the legal arrangement whereby two or more persons -- meaning either individuals or corporations -- carry on business in common with a view to profit.

In Canada, most partnership arrangements take the form of either a general partnership or a limited partnership.

The defining feature of a general partnership is that the liability of the partners for the debts and obligations of the partnership is unlimited. That means that every partner is personally responsible and, as such, can be held to account for any obligation of the partnership, including any obligation which another partner incurs on behalf of the partnership.

By contrast, a limited partnership arrangement limits the liability of certain of the partners (limited partnerships will be the subject of the next column).

General partnership arrangements are covered in each province by partnership legislation. The legislation does not require any special steps to be taken to set up a general partnership. As soon as you and one or more other persons carry on business together with the intent of making a profit you are doing business in partnership. This is so regardless of what you agreed to among yourselves or whether you have taken any other steps to formalize your relationship (e.g., by entering into a written partnership agreement).

Thus, to both protect yourself and make clear your intent, it is important that you enter into a partnership agreement before you commence doing business. A partnership agreement determines your rights with respect to your partners and the partnership. If there is no agreement, the rights and obligations of the partners will be governed by partnership legislation and the common law.

Carrying on a business in the form of a general partnership has its advantages, including the following:

* Your partnership commences whenever you and your partners commence whatever business activity you plan to carry on.

* Apart from the costs of registering your partnership name and obtaining legal advice with respect to the preparation of your partnership agreement, there are very few other expenses you will likely have to incur in setting up a general partnership.

* All of the benefits of the partnership belong to the partners personally. Practically speaking, that means that every partner has a right to a portion of the profits of the partnership based on whatever formula for distribution of the profits the partners agree to.

* A partnership can have employees.

* The income earned by the partnership is attributable to the partners personally and, in the case of a partner who is an individual, is taxed at the individual rate set under the federal Income Tax Act. If the partnership creates losses, those losses can be used to reduce your overall income from other sources and, hence, your personal income tax.

Of course, there are also disadvantages to carrying business in the form of a general partnership. They include the following:

* Any partner acting on behalf of the partnership legally binds all of the other partners. Thus, for example, if your partner enters into a contract on behalf of the partnership then all of your other partners are bound by that contract. That, of course, opens the door to abuse by unscrupulous partners.

* Just as the benefits of the partnership belong to each of the partners personally, so the obligations of the partnership are those of those partners personally too. Each of you is together with the other partners and also by yourself (i.e. jointly and severally) liable for the debts and obligations of the partnership.

* As noted, your liability as a partner is unlimited. That means your personal assets can be seized by the courts for purposes of satisfying any debts of the partnership.

* Dissolving a partnership -- bringing it to an end -- is not always a simple matter. In most cases, dissolution requires the agreement of all of the partners. Where you don't agree, then legislation provides for certain circumstances in which a partnership may be dissolved, including where a partner dies or becomes insolvent.

A general partnership is a good way for two or more persons with faith in each other's integrity and business skills to carry on business together. Be sure to consult your lawyer to see if a general partnership is best suited to meet your needs.

Nishan Swais is a lawyer with the firm of Miller Thomson in Toronto, Ontario.
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Author:Swais, Nishan
Publication:LawNow
Date:Apr 1, 1999
Words:721
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