Difference between revisions of "Forming a Partnership"

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{{REVIEWEDPLS | reviewer = [http://severidelawgroup.com/oliver-b-hamilton/ Oliver Hamilton], Severide Law Group|date= March 2018}} {{Dial-A-Law TOC|expanded = business}}


If you’re involved in a business venture or plan to start a small business with someone else, you might be thinking about forming a partnership. (There are also other ways to run a business, so you should refer to script [[Starting a Small Business (Script 265)|265]] on “Starting a Small Business” to find out more about the alternatives before deciding on a partnership.)
If you’re starting a business with someone else, a '''partnership''' is an option to consider. They can work well for real estate businesses, professionals and new businesses. Learn what’s involved.


==What is a partnership?==
==What you should know==
A partnership is formed when two or more people – or companies, for that matter – agree to carry on a business together and share its profits and losses. Whether or not you are actually profitable doesn’t matter. What counts is forming a business together with the intention of making a profit.


==BC’s ''Partnership Act'' sets out the rules for partnerships==
===Pros and cons of a partnership===
These rules apply automatically to all partnerships. If you choose to be involved in a partnership, you may want to change some of these rules by making a written partnership agreement. Partnership agreements are discussed toward the end of this script.
A '''partnership''' is a legal entity formed when two or more people — or companies — carry on a business together, intending to make a profit. It doesn’t matter if they make a profit. The law can find that a partnership exists even if it doesn’t make a profit.


==Are there different types of partnerships?==
====Advantages====
The ''Partnership Act'' talks about three types:
Partners can get personal tax exemptions and use partnership expenses as personal tax deductions during the startup phase of a new business. Shareholders in a company can’t do these things. Later, when the business grows and has greater risks, it may be good to convert the partnership to a company.
 
====Disadvantages====
Being in a partnership can have serious legal consequences. Most important is the potential '''joint liability''' — each partner could be personally liable for the acts or omissions of the other partners. Creditors of the partnership, or other people harmed by it, can sue one, some or all of the partners for their losses. So one partner could be responsible for all the losses of a partnership, even though they didn’t directly cause the losses.
 
But partners can take steps to reduce the risks. For example, they can use a limited liability partnership (LLP), explained below. And they can get insurance.
 
===How a general partnership works===
The ''[https://www.canlii.org/en/bc/laws/stat/rsbc-1996-c-348/latest/rsbc-1996-c-348.html Partnership Act]'' establishes three types of partnerships:
*general partnerships
*general partnerships
*limited partnerships
*limited partnerships
*limited liability partnerships
*limited liability partnerships


==Most small business partners are partners in a general partnership==
====General partners share equally in the profits...====
To understand how a general partnership operates, say you and your friend Bill Smith want to open a store and be partners. You would both be equal partners. The law presumes that, as partners, you and Smith would share equally in the profits and losses of the partnership business, unless you have a partnership agreement that sets out a different arrangement. And you would both have the right to be involved in managing the partnership.
To understand how a '''general partnership''' operates, say you and your friend Lin want to open a store and be business partners. You would both be equal (50/50) partners. The law presumes that, as partners, you and Lin would share equally in the profits and losses of the partnership, unless your partnership agreement sets out a different split. And you would both have the right to manage the partnership.
 
====...and share equally in the losses====
General partners are each '''personally responsible''' for the partnership’s debts. This is true for both active and inactive partners in the business.
 
To show how a general partnership works, suppose that you and Lin borrow $10,000 to set up a shop. Your business doesn’t do well, and the partnership cannot repay the loan. The bank can ask you and Lin to pay back $5,000 each. But if Lin can’t or won’t pay their share, the bank can sue you alone for the whole $10,000. It would then be up to you to try to get Lin’s share from them.
 
And if you don’t have enough to repay the debt, the bank could take your personal assets — such as your house or car — even though they are not used in the business.


==Is a partner responsible for the general partnership’s debts?==
In contrast, company shareholders are liable for company debts only if they have personally guaranteed the company’s debts.
Yes. General partners are each personally responsible for the partnership’s debts. This is true whether or not you’re an active or inactive partner in the business.


Suppose you and Smith borrow $10,000 to set up your shop, but your business doesn’t do well and the partnership cannot repay the loan. Of course, the bank can ask that you and Smith pay back $5,000 each. But there’s also nothing to stop the bank from suing you alone for the whole $10,000. It would then be up to you to try to get Smith’s share from him. And if you don’t have enough cash to repay the debt, your personal assets – such as your house or car – could be taken, even though they have no connection with the business.
In a general partnership, each partner is personally liable for all the obligations of the partnership, including those resulting from any negligent conduct of a partner in the partnership business.


In a general partnership, each partner is personally liable for all of the obligations of the partnership, including any negligence of one of the partners.
===Any general partner can make decisions for the partnership===
Each general partner is an agent for both the partnership and the other partners. You and Lin can both make contracts for the partnership that legally bind all the partners. If Lin signs a contract with Jane Jones for supplies for the partnership business, you, Lin, and the partnership must each fulfill the contract, whether you agree with it or not.


==Can any partner make decisions on behalf of the partnership?==
And any partnership agreement between you and Lin cannot limit your responsibility to people who innocently sign a deal with Lin, believing Lin is authorized to act for the partnership.
Yes. Each general partner is an agent for both the partnership and the other partners. You and Smith can both make legally binding contracts on behalf of the partnership. So if Smith signs a contract with Jane Jones for supplies for the partnership business, you, Smith and the partnership each have to fulfill the contract, whether you agree with it or not.


And any partnership agreement between you and Smith cannot limit your responsibility to individuals who innocently sign a deal with Smith, believing he is authorized to act on behalf of the partnership.  
===Duties general partners owe one another===
General partners owe a duty to each other to act with '''good faith''' and '''fairness'''. You must give each other full information on matters affecting the partnership. You can’t take advantage of something that belongs to the partnership without your partners’ permission, such as using the partnership’s business connections to set up a competing business on the side. And you can’t take a personal benefit from any transaction involving the partnership — like kickbacks from suppliers.


==General partners must act in good faith==
===A limited partner is not involved in running the business===
General partners owe a duty to each other to act with utmost good faith and fairness. You have to give each other full information on matters affecting the partnership. You can’t take advantage of something that belongs to the partnership without your partners’ permission, such as using the partnership’s business connections to set up a competing business on the side. And you can’t take a personal benefit from any transaction involving the partnership – like taking kickbacks from suppliers.
'''Limited partnerships''' are mainly for investors who want to invest in a partnership business, but who don’t want to run the business. If you’re an investor only, you could be a limited partner and you would be responsible only for the debts of the partnership up to the amount of money you invested or agreed to invest. This is true if you don’t help manage the partnership. But if you help manage the business, then you would have the same liability as if you were a partner in a general partnership.


==It’s important to choose your partners carefully==
A limited partnership must have at least one general partner who has the usual unlimited personal liability described earlier. Usually, the general partner is a company incorporated just for that purpose, so that its shareholders aren’t personally liable for the obligations of the company (see our information on [https://dialalaw.peopleslawschool.ca/incorporating-a-company/ companies]). The general partner is the only partner who can manage the business, so the shareholders who have most of the voting shares of a general partner company also control the management of the partnership business.
You should only be partners with people you trust and have confidence in.


==It’s best to have a partnership agreement==
===A limited liability partnership can limit your liability===  
A carefully drafted agreement can be a very useful planning tool and help your partnership run smoothly. It can cover certain things like the following:
A '''limited liability partnership''' (LLP) is an alternative to a general partnership. If you’re a partner in an LLP, you aren’t liable for the obligations of other partners or the partnership that you would be liable for in a general partnership — unless those obligations result from your own actions or inaction. If you haven’t personally incurred any debts, the most you would lose is your investment in the partnership. Your personal and other assets, like your home, wouldn’t be at risk. So with a limited liability partnership, you can help run the partnership business, but have some protection from being sued for the negligence or wrongdoing of your partners.
*Will you share the profits 50/50? What if one of you puts up more money at the beginning than the other?
*Will you also share equally in the losses?
*Who will manage the business? (If you’re going to run the store and expect to get paid a salary, this should be included in your agreement or in a separate employment agreement.)
*How much money will each partner contribute, and when will it have to be paid?
*How will decisions be made? By majority vote, or unanimous decision? (You could agree to make some decisions one way, and other decisions another way.)
*How will new partners be brought into the business, and how can you get rid of a partner or leave the partnership if you have to?
*How will you end the partnership when the time comes, and who’ll get what?
*What happens when a partner doesn’t live up to his or her obligations?


It’s true that verbal partnership agreements or “hand shake” agreements may be enforceable. But partnership agreement should be in writing, so you can prove what the terms of the agreement are.
It’s possible to convert a general partnership or limited partnership to a limited liability partnership.


==What is a limited partnership?==
===Income tax payable by a partnership===
Limited partnerships are mainly a tool for investors who want to invest in the partnership business, but who aren’t interested in getting involved in running the business. If you’re an investor only, you could be a limited partner and would only be responsible for the debts of the partnership up to the amount of money you invested or agreed to invest. This is true so long as you don’t get involved in the management of the partnership. But if you help manage the business, then you would have the same liability you’d have if you were a partner in a general partnership.
A partnership doesn’t have to pay any income tax on its profits. But each partner must pay income tax on their share of partnership profits.


Note that a limited partnership must have at least one general partner who has the usual unlimited personal liability. Usually the general partner is a company incorporated just for that purpose, so that its shareholders aren’t generally personally liable for the obligations the company has as a company (refer to script [[Forming a Private Company  (Script 267)|267]] for more information about companies). The general partner is the only partner who can manage the business, so the shareholders who have most of the voting shares of a general partner company also control the management of the partnership business.
If a partnership loses money, the losses are divided among the partners in the same way as profits would be. For income tax purposes, it’s as though each partner had lost that money running their own business.


==What is a limited liability partnership?==
Before setting up a partnership, consider getting income tax advice from a qualified professional.
A limited liability partnership (or LLP) is an alternative to a general partnership. The idea is that if you’re a partner in an LLP, you aren’t liable for the obligations of other partners or the partnership to the same extent you would be if the partnership was a general partnership – unless those obligations result from your own actions or inaction. Assuming you haven’t personally incurred any debts, the most you would lose is your investment in the partnership. Your personal and other assets, like your home, wouldn’t be at risk. So with a limited liability partnership, you can be involved in running the partnership business, but enjoy some protection from being sued for the negligence or wrongdoing of your partners.


It’s possible to convert a general partnership or limited partnership to a limited liability partnership.
===Ending a partnership===
Any partner can end a partnership any time by giving notice to all the other partners — unless the partnership agreement says otherwise. Alternatively, a partnership agreement can set a fixed term for the partnership, meaning it automatically ends after a certain time, or after a task or project ends.


==Does a partnership have to be registered?==
When the partnership is over, [https://www2.gov.bc.ca/gov/content/employment-business/business/managing-a-business/permits-licences/businesses-incorporated-companies/proprietorships-partnerships/dissolution you file a '''dissolution of partnership registration'''] with the BC Registrar of Companies. At that point, your ongoing liabilities end.
Limited partnerships and LLP’s must be registered with the Registrar of Companies to exist. The Partnership Act contains a list of the documents that must be filed or submitted to create these partnerships. A general partnership should be registered, but it will still exist even if you don’t register it.


You should make sure that you let the Registrar know if any information on your registration changes (for example, if a partner joins or leaves, or if your address changes).
====Disputes between partners====
[https://www.canlii.org/en/bc/laws/stat/rsbc-1996-c-348/latest/rsbc-1996-c-348.html Under the ''Partnership Act''], a partner cannot be expelled from a partnership, even by a majority vote, unless the power to do so is in a partnership agreement. If no expulsion power is in the partnership agreement, the only option would be to dissolve the partnership.


You have to pay a fee to register your partnership with the Registrar of Companies and to have the Registrar search the corporate records to make sure someone else isn’t already using your partnership name. Depending on the type of partnership, procedures must be followed regarding the use of the partnership name and address. If your partnership is for trading, manufacturing or mining purposes, or is a limited partnership or a limited liability partnership, you also have to file other information and documents with the provincial government.
==Form the partnership==


==Consider seeing a lawyer==
===Step 1. Choose your partners carefully===
Before making a partnership agreement, it’s best to hire a lawyer to help you. Also, limited liability partnerships and limited partnerships are usually quite complicated, so you typically need the assistance of a lawyer to set them up.
You should be partners only with people you trust and have confidence in.
===Step 2. Make a partnership agreement===
A carefully drafted contract called a '''partnership agreement''' can be a very useful planning tool and help your partnership run smoothly. It can cover things like:
* Will you share the profits 50/50? What if one of you puts up more money at the start than the other?
* Will you share equally in the losses?
* Who will manage the business? (If you’re going to run the store and expect to get a salary, this should be included in your agreement or in a separate employment agreement.)
* How much money or property (for example, equipment) will each partner contribute, and when will it have to be paid?
* How will decisions be made? By majority vote, or unanimous decision? (You could agree to make some decisions one way, and other decisions another way.)
* How will new partners be brought into the business, and how can you get rid of a partner or leave the partnership if you must?
* How will you end the partnership when the time comes, and who’ll get what?
* What happens when a partner doesn’t live up to their obligations?


==What income tax does a partnership have to pay?==
Verbal partnership agreements or hand-shake agreements are enforceable, but they can pose problems. Partnership agreements should be in writing, dated, and signed by all parties, so you can more easily prove its terms and have more certainty in your business. The best time to create a partnership agreement is early, before disagreements arise and become unsolvable.
The good news is that a partnership doesn’t have to pay any income tax on its profits. Unfortunately, there is the usual bad news – each partner has to pay income tax on his or her share of partnership profits. Likewise, if a partnership business loses money, the losses are divided among the partners in the same way as profits would have been, and for income tax purposes, are treated as though each partner had lost that amount of money running his or her own business.


Before setting up a partnership, in addition to consulting a lawyer, you should obtain some income tax advice from a qualified professional.
===Step 3. Register the partnership===
Limited partnerships and limited liability partnerships must be registered with the Registrar of Companies. The '[https://www.canlii.org/en/bc/laws/stat/rsbc-1996-c-348/latest/rsbc-1996-c-348.html ''Partnership Act''] has a list of the documents that must be filed to create these partnerships. General partnerships should be registered, but they still exist even if you don’t register them.


==How do you end a partnership?==
You should let the Registrar know if any information on your registration changes (for example, if a partner joins or leaves, or if your address changes).
When the partnership is over, a Dissolution of Partnership (Form 3) should be filed with the BC Registrar of Companies. At that point, you stop any of your ongoing liabilities.


==Where can you get more information?==
You must pay a fee to register your partnership with the Registrar of Companies and to have the Registrar search the corporate records to make sure someone else isn’t using your partnership name. Depending on the type of partnership, there are procedures for using the partnership name and address.
*You can obtain a copy of BC’s ''Partnership Act'' from any bookstore that sells government publications or download a copy from [http://www.bclaws.ca www.bclaws.ca].
*Small Business BC is a government resource centre with excellent information and free guides. Call 604.775.5525 in Vancouver or 1.800.667.2272 elsewhere in the province, or visit [http://www.smallbusinessbc.ca www.smallbusinessbc.ca].
*See the information for businesses on the provincial Ministry of Finance website at [http://www.sbr.gov.bc.ca/business.html www.sbr.gov.bc.ca/business.html].
*Also see the provincial government’s Resource Centre for Small Business at [http://www.resourcecentre.gov.bc.ca www.resourcecentre.gov.bc.ca].


If your partnership is for trading, manufacturing, or mining purposes, or is a limited partnership or a limited liability partnership, you must also file other information and documents with the provincial government.


[updated July 2013]
==Who can help==


===With more information===
[https://smallbusinessbc.ca/ Small Business BC] is a government resource centre with information and free guides. Call 604-775-5525 in Vancouver or 1-800-667-2272 elsewhere in BC.


----
See the Ministry of Finance [https://www2.gov.bc.ca/gov/content/employment-business/business/small-business small business website].
----


Also see the provincial government’s [https://www2.gov.bc.ca/gov/content/employment-business/business/small-business/resources Resource Centre for Small Business].


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Latest revision as of 02:50, 11 September 2020

This information applies to British Columbia, Canada. Last reviewed for legal accuracy by Oliver Hamilton, Severide Law Group in March 2018.

If you’re starting a business with someone else, a partnership is an option to consider. They can work well for real estate businesses, professionals and new businesses. Learn what’s involved.

What you should know

Pros and cons of a partnership

A partnership is a legal entity formed when two or more people — or companies — carry on a business together, intending to make a profit. It doesn’t matter if they make a profit. The law can find that a partnership exists even if it doesn’t make a profit.

Advantages

Partners can get personal tax exemptions and use partnership expenses as personal tax deductions during the startup phase of a new business. Shareholders in a company can’t do these things. Later, when the business grows and has greater risks, it may be good to convert the partnership to a company.

Disadvantages

Being in a partnership can have serious legal consequences. Most important is the potential joint liability — each partner could be personally liable for the acts or omissions of the other partners. Creditors of the partnership, or other people harmed by it, can sue one, some or all of the partners for their losses. So one partner could be responsible for all the losses of a partnership, even though they didn’t directly cause the losses.

But partners can take steps to reduce the risks. For example, they can use a limited liability partnership (LLP), explained below. And they can get insurance.

How a general partnership works

The Partnership Act establishes three types of partnerships:

  • general partnerships
  • limited partnerships
  • limited liability partnerships

General partners share equally in the profits...

To understand how a general partnership operates, say you and your friend Lin want to open a store and be business partners. You would both be equal (50/50) partners. The law presumes that, as partners, you and Lin would share equally in the profits and losses of the partnership, unless your partnership agreement sets out a different split. And you would both have the right to manage the partnership.

...and share equally in the losses

General partners are each personally responsible for the partnership’s debts. This is true for both active and inactive partners in the business.

To show how a general partnership works, suppose that you and Lin borrow $10,000 to set up a shop. Your business doesn’t do well, and the partnership cannot repay the loan. The bank can ask you and Lin to pay back $5,000 each. But if Lin can’t or won’t pay their share, the bank can sue you alone for the whole $10,000. It would then be up to you to try to get Lin’s share from them.

And if you don’t have enough to repay the debt, the bank could take your personal assets — such as your house or car — even though they are not used in the business.

In contrast, company shareholders are liable for company debts only if they have personally guaranteed the company’s debts.

In a general partnership, each partner is personally liable for all the obligations of the partnership, including those resulting from any negligent conduct of a partner in the partnership business.

Any general partner can make decisions for the partnership

Each general partner is an agent for both the partnership and the other partners. You and Lin can both make contracts for the partnership that legally bind all the partners. If Lin signs a contract with Jane Jones for supplies for the partnership business, you, Lin, and the partnership must each fulfill the contract, whether you agree with it or not.

And any partnership agreement between you and Lin cannot limit your responsibility to people who innocently sign a deal with Lin, believing Lin is authorized to act for the partnership.

Duties general partners owe one another

General partners owe a duty to each other to act with good faith and fairness. You must give each other full information on matters affecting the partnership. You can’t take advantage of something that belongs to the partnership without your partners’ permission, such as using the partnership’s business connections to set up a competing business on the side. And you can’t take a personal benefit from any transaction involving the partnership — like kickbacks from suppliers.

A limited partner is not involved in running the business

Limited partnerships are mainly for investors who want to invest in a partnership business, but who don’t want to run the business. If you’re an investor only, you could be a limited partner and you would be responsible only for the debts of the partnership up to the amount of money you invested or agreed to invest. This is true if you don’t help manage the partnership. But if you help manage the business, then you would have the same liability as if you were a partner in a general partnership.

A limited partnership must have at least one general partner who has the usual unlimited personal liability described earlier. Usually, the general partner is a company incorporated just for that purpose, so that its shareholders aren’t personally liable for the obligations of the company (see our information on companies). The general partner is the only partner who can manage the business, so the shareholders who have most of the voting shares of a general partner company also control the management of the partnership business.

A limited liability partnership can limit your liability

A limited liability partnership (LLP) is an alternative to a general partnership. If you’re a partner in an LLP, you aren’t liable for the obligations of other partners or the partnership that you would be liable for in a general partnership — unless those obligations result from your own actions or inaction. If you haven’t personally incurred any debts, the most you would lose is your investment in the partnership. Your personal and other assets, like your home, wouldn’t be at risk. So with a limited liability partnership, you can help run the partnership business, but have some protection from being sued for the negligence or wrongdoing of your partners.

It’s possible to convert a general partnership or limited partnership to a limited liability partnership.

Income tax payable by a partnership

A partnership doesn’t have to pay any income tax on its profits. But each partner must pay income tax on their share of partnership profits.

If a partnership loses money, the losses are divided among the partners in the same way as profits would be. For income tax purposes, it’s as though each partner had lost that money running their own business.

Before setting up a partnership, consider getting income tax advice from a qualified professional.

Ending a partnership

Any partner can end a partnership any time by giving notice to all the other partners — unless the partnership agreement says otherwise. Alternatively, a partnership agreement can set a fixed term for the partnership, meaning it automatically ends after a certain time, or after a task or project ends.

When the partnership is over, you file a dissolution of partnership registration with the BC Registrar of Companies. At that point, your ongoing liabilities end.

Disputes between partners

Under the Partnership Act, a partner cannot be expelled from a partnership, even by a majority vote, unless the power to do so is in a partnership agreement. If no expulsion power is in the partnership agreement, the only option would be to dissolve the partnership.

Form the partnership

Step 1. Choose your partners carefully

You should be partners only with people you trust and have confidence in.

Step 2. Make a partnership agreement

A carefully drafted contract called a partnership agreement can be a very useful planning tool and help your partnership run smoothly. It can cover things like:

  • Will you share the profits 50/50? What if one of you puts up more money at the start than the other?
  • Will you share equally in the losses?
  • Who will manage the business? (If you’re going to run the store and expect to get a salary, this should be included in your agreement or in a separate employment agreement.)
  • How much money or property (for example, equipment) will each partner contribute, and when will it have to be paid?
  • How will decisions be made? By majority vote, or unanimous decision? (You could agree to make some decisions one way, and other decisions another way.)
  • How will new partners be brought into the business, and how can you get rid of a partner or leave the partnership if you must?
  • How will you end the partnership when the time comes, and who’ll get what?
  • What happens when a partner doesn’t live up to their obligations?

Verbal partnership agreements or hand-shake agreements are enforceable, but they can pose problems. Partnership agreements should be in writing, dated, and signed by all parties, so you can more easily prove its terms and have more certainty in your business. The best time to create a partnership agreement is early, before disagreements arise and become unsolvable.

Step 3. Register the partnership

Limited partnerships and limited liability partnerships must be registered with the Registrar of Companies. The 'Partnership Act has a list of the documents that must be filed to create these partnerships. General partnerships should be registered, but they still exist even if you don’t register them.

You should let the Registrar know if any information on your registration changes (for example, if a partner joins or leaves, or if your address changes).

You must pay a fee to register your partnership with the Registrar of Companies and to have the Registrar search the corporate records to make sure someone else isn’t using your partnership name. Depending on the type of partnership, there are procedures for using the partnership name and address.

If your partnership is for trading, manufacturing, or mining purposes, or is a limited partnership or a limited liability partnership, you must also file other information and documents with the provincial government.

Who can help

With more information

Small Business BC is a government resource centre with information and free guides. Call 604-775-5525 in Vancouver or 1-800-667-2272 elsewhere in BC.

See the Ministry of Finance small business website.

Also see the provincial government’s Resource Centre for Small Business.

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