Canadian Business Law/Partnerships

Partnerships

A Partnership is a form of business organization in which two or more individuals carry on a business. It is a creature of both common law and statute, and has both contractual and agency dimensions.

Partnerships are contractual because the terms of the relationship may be determined or altered by agreement between the parties. It should be noted, however, that a partnership contract will be implied by law in some situations.

A partnership is also an agency relationship because each partner is the agent of the other(s) for the purpose of the business. This means that one partner may bind all the other partners to a contract, or exercise any other power agents generally have. Importantly, this also means that each of the partners owes a fiduciary duty to the others.

Similar to a sole proprietorship (with limited exceptions), the business of a partnership does not have a separate legal identity from the partners. For example, the income of the business is taxed as income to the individual partners. Conversely, if the business fails, each partner is responsible for a proportional share of the losses. The joint responsibility of the partners for any and all losses incurred by the business means the partners have unlimited liability in a general partnership.

In general, a partnership has no legal identity separate from that of its principles. As such it is not capable of things such as owning land or acquiring debt on its own. It may, however, have a separate legal existence in the limited sense that the partners of a business may be sued in the name of the business where civil procedure rules allow for it (see Civil Procedure Rules - Nova Scotia, at Rule 7.01). Further, some partnership legislation in Canada uses language that implies separate legal existence (see Partnership Act, R.S.N.S. 1989, c. 334, at s. 47(b)).

There are several different ways in which a partnership may be structured. The most basic form is the general partnership, but partnerships may also exist as limited partnerships or limited liability partnerships.

Types of Partnerships

General Partnership

The general partnership is the most common form of partnership and has all of the features discussed above. It may occur by agreement or by operation of law. Each partner has unlimited liability with respect to the business and is jointly and severally liable with all other partners.

Limited Partnership

A limited partnership is a statutory creation that differs from the general form in that it provides a way for one or more of the partners to limit their liabity with respect to the operation of the business. Unlike a general partnership, which can be inferred based on the relationship between the parties, a limited partnership must be structured intentionally in accordance with the statutory provisions in the jurisdiction, which will usually require registration. Not all Canadian jurisdictions allow for limited partnerships, and as such, they can only be created in jurisdictions that have passed supporting legislation.

Typically, the legislation will require that there is at least one general partner, whose liability is unlimited. As many additional limited partners as desired can then be added. The limited partners liability will be restricted to the amount of their capital contribution to the business.