When starting up a business, you will have to decide on the form of business entity that suits your specific needs. Three of the most common business entities are sole proprietorships, partnerships and corporations. In this article we will canvas some of the unique features of a partnership – from creation to dissolution.
Each province in Canada has different laws governing partnerships. In BC, partnerships are governed by the Partnership Act (the “Act”). There are three types of partnerships contemplated in the Act: general partnership, limited partnership and limited liability partnership.
A general partnership is formed automatically when two or more persons are “carrying on business in common with a view of profit”. This means that parties can inadvertently enter into a general partnership and, accordingly, become subject to the rules governing general partnerships without even knowing they are doing so. Although registration is not necessary for a general partnership, it is prudent in certain circumstances (to secure your business name, for financing purposes, etc.). That being said, general partnerships must register within 3 months of forming the partnership if they are in partnership for the purpose of trading, manufacturing or mining. Limited partnerships and limited liability partnerships only come into existence upon meeting certain registration requirements and filing a certificate with the registrar. The requirements for limited partnerships and limited liability partnerships are set out in section 51 and 96 of the Act, respectively.
Unlike a corporation, a partnership is not a separate entity for tax purposes. We recommend obtaining advice from an accountant with regards to the taxation of partnerships.
The Act does not require annual maintenance or filings with respect to general partnerships and limited partnerships. The Act does require the filing of an annual report with respect to limited liability partnerships. Limited liability partnerships must file their annual report within 2 months after each anniversary of the date on which the limited liability partnership was registered.
All partners in general partnerships each have unlimited joint liability. This means that a person who has a claim against the partnership may claim against any one of the partners for 100% of the value of the claim. The partner who pays out does not have a claim against the other partner(s) to be reimbursed for their proportionate share. All partners in limited liability partnerships each have several limited liability (with certain exceptions). This means that a person who has a claim against the partnership may only claim against any one partner their proportionate share of the liability (which is based on their proportionate share of the partnership).
There are two types of partners in a limited partnership – general partners and limited partners. There must be at least one general partner in a limited partnership who is responsible for the day-to-day operations of the business. There must also be at least one limited partner in a limited partnership who can contribute money and property, but not services. The general partners of a limited partnership have unlimited joint liability and the limited partners have unlimited several liability (again, with certain exceptions). Several liability permits a limited partner who pays out on a claim to bring a claim against the other partner(s) for their proportionate share of the liability (which is based on their proportionate share of the partnership).
The Act includes a standard set of rules with respect to when property becomes “partnership property”, decision-making power, liability and the sharing profits and losses. Generally, all partners are deemed to be equal under the Act (with the exception of limited partners in a limited partnership which receive priority in certain circumstances). Subject to certain exceptions, the standard rules set out in the Act can be modified by a partnership agreement signed by the partners of the partnership. Partnership agreements are often required by lenders as a condition of financing. Partnership agreements are also a great tool to define the relationship between the partners and their respective obligations to the business and each other.
Dissolution of a partnership will be triggered by different events depending on the type of partnership. A general partnership is dissolved, for example, by:
- the death, bankruptcy or dissolution of a partner of a general partnership with only two members (and in some cases, a general partnership with more than two members);
- notice by one partner of his or her intention to dissolve;
- the expiry of a set term (if any), or the termination of the single adventure or undertaking for which the partnership was formed (if any).
Some examples of the circumstances under which a limited partnership is dissolved include:
- the bankruptcy, retirement, death, mental incompetence or dissolution of the sole general partner;
- the death of the sole limited partner; or
- in the event that the sole limited partner loses his or her status as a limited partner (Ex. by providing services to the partnership). In the event that the limited partnership dissolves because it no longer has a limited partner, the partnership automatically becomes a general partnership.
A limited liability partnership is dissolved upon the cancellation of its registration (Ex. by providing notice to the registrar or failing to file its annual report for 2 consecutive years).
If you would like to learn more about partnerships, or alternate forms of business entities, please do not hesitate to contact one of the lawyers practicing in the area of business law at 250-448-2637.
Author: Danielle (Dani) Brito
This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250)448-2637 or any of our lawyers practicing in the area of business law at the following: