Partnership
Partnership is used “when two or more persons carry on business together with a view to a profit” (Ontario Partnership Act). It may arise in relation to a single transaction, time-limited activity (Spire Freezes Ltd v The Queen) or by filing government forms (Prince Albert Co-operative Assn v Rybka) or co-ownership of real estate, active involvement in management, profit sharing and receipt of rent (AE LePage Ltd v Kamex Development Ltd).
Three are types of partnerships: (1) General Partnership, (2) Limited Liability Partnership (“LLP”), and (3) Limited Partnership. In Ontario, LLPs may be formed only by professionals whose governing legislation permits LLPs to practice the profession only (e.g., lawyers, chartered accountants, and certified general accountants) (Anthony VanDuzer).
Advantage vs. Disadvantages
Advantages:
Partners carry on business by themselves. This business form can be easily dissolved (Anthony VanDuzer). All benefits accrue directly to partners. Each partner’s share of income is calculated at the “firm” level and is allocated per partner’s entitlement under a partnership statute or partnership agreement (Anthony VanDuzer).
Businesses may invest in a partnership to take advantage of the deductibility of losses (Backman v The Queen), which needs to be done under the advice of a lawyer or an accountant to avoid litigation.
Finally, property consists of all property contributed to a partnership, including the one acquired on its behalf. By agreement partners may determine what can be done with the property (Anthony VanDuzer at 56).
The Ontario Partnership Act (OPA) provides a set of default rules (ss. 20-31) that helps govern the relationships among partners. These optional and flexible rules can be modified and replaced by a partnership agreement.
Partners owe each other fiduciary duty meaning they must deal with each other in the “utmost good faith” (Anthony VanDuzer at 54) and share “full accounts and all information”(OPA, s. 28).
Disadvantages
Partnership is not a separate legal entity. Similarly to the sole proprietorship, each partner has unlimited personal liability for the business and to third parties. There are mandatory rules for liability to third parties (OPA, ss. 6-19).
In a general partnership, each partner has unlimited personal liability (Anthony VanDuzer at 85; OPA, ss. 6, 10-13). LLPs are similar to general partnerships; however, a partner is not personally responsible for liabilities, debts and obligations of a partnership or another partner for wrongful acts, including negligence. That being said, a partner remains liable for her own negligence and that of their employees. In situations involving criminal liability or fraud, knowledge of the acts and liability may be imputed (OPA, ss. 10, 44.1).
In a limited partnership, at least one partner has unlimited personal liability while one limited partner has liability limited to the amount contributed to the partnership (Anthony VanDuzer at 85; OLPA, ss. 8, 9).
Specifically in the context of litigation, all personal assets may be seized. Each partner is to contribute equally to the judgement (OPA, s. 24). A partner may file a lawsuit against other partners to recover her contribution.
Other Things to Consider:
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Not all partners may have the authority to act on behalf of the partnership (OPA, s. 11). Namely, Employment status-wise, partners cannot enter into a contract of employment with the partnership. Finally, personal Income Tax calculations are done for reporting purposes.
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As for the legal requirements, the business name registration is mandatory (OBNA, s. 2(3)).
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Government registration fee is the same as for the sole proprietorship. Additionally, there is an identical licensing requirement (Master Business Licence).