Partnership Law in Ontario

wo business partners cementing an agreement with a handshake, as legal contracts stand by awaiting finalization

Partnerships can foster collaboration and the sharing of resources, skills, and risks. Below is an an overview of partnership law in Ontario, highlighting the key aspects of partnerships, the different types, their rights and duties, and a comparison with other business structures.

What is a Partnership?

A partnership is a voluntary association of two or more persons agreeing to carry on a business in common with a view to making a profit. Partnerships are governed by the Ontario Partnerships Act, which sets out the rules and regulations for establishing and operating partnerships in the province.

Types

There are three main types of partnerships in Ontario: general, limited, and limited liability partnerships (LLPs).

General: A general partnership is the most common. Partners have equal rights in the management and decision-making and each is jointly and severally liable for the partnership’s debts and obligations, meaning they can be held personally responsible for the entire amount of any debts incurred by the partnership.
Limited: A limited partnership consists of at least one general partner and one or more limited partners. The general partner manages the business and has unlimited liability for the partnership’s debts and obligations, while the limited partners have limited liability, which means that their liability is restricted to the amount they have invested in the partnership.
Limited liability partnership (LLP): An LLP is a special type of partnership commonly used by professionals, such as lawyers and accountants. In an LLP, the liability of each partner is limited to the extent of their investment in the partnership, and they are not personally liable for the negligence or misconduct of other partners, with exceptions.

Rights and Duties

Partners have certain rights and duties, including fiduciary duties that are owed to one another. Fiduciary duties are legal obligations that require partners to act in the best interests of the partnership and their fellow partners. Some of the key fiduciary duties include:

Loyalty: Partners must act honestly and in good faith in their dealings with the partnership and other partners.
Care: Partners must exercise the level of care and skill that a reasonably prudent person would exercise in similar circumstances.
Good Faith: Partners must act in the best interests of the partnership and avoid conflicts of interest.
Duty to Disclose: Partners must disclose any material information that could affect the partnership’s business or the interests of other partners.

In addition to fiduciary duties, partners have the right to share in the profits of the partnership and must also share in its losses. Partners typically make decisions together, with each having one vote. The partners must come to an agreement to admit new partners or dissolve the partnership.

Dissolution

Partnerships can be dissolved for various reasons, such as the expiration of the partnership term, the completion of the partnership’s purpose, the death or bankruptcy of a partner, or by agreement among the partners. In some cases, a court may order the dissolution of a partnership if it is in the best interests of the partners to do so.

Partnership lawyers captured in a moment of lively debate, working out the final details of an agreement in their office as sunlight streams through the glass

When a partnership is dissolved, the partners must go through “winding up,” which involves settling the partnership’s debts and obligations and distributing the remaining assets among the partners.

Comparison with Other Business Structures

Partnerships can be compared to other business structures, such as sole proprietorships and corporations, based on factors such as liability, management, and taxation.

Partnership vs. Sole proprietorship: In a sole proprietorship, the business is owned and operated by an individual with complete control over the management of the business. The sole proprietor receives all profits of the businesses but is personally liable for all of its debts and obligations. In contrast, a partnership involves two or more partners who share the rights and responsibilities of managing the business and are jointly and severally liable for the partnership’s debts and obligations.
Partnership vs. Corporation: A corporation is a separate legal entity owned by shareholders and managed by directors. Shareholders have limited liability, meaning they are only liable for the amount they have invested in the corporation. In contrast, partners in a general partnership have unlimited liability for the partnership’s debts and obligations. Additionally, corporations are subject to different tax rules than partnerships, with corporations being taxed at the corporate level and shareholders being taxed on any dividends they receive, whereas partnerships are generally not taxed at the partnership level but instead pass the income and losses through to the individual partners, taxed at their personal income tax rates.

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Conclusion

Partnerships offer a flexible and collaborative business structure advantageous for many businesses. But if you are considering entering into a partnership, understand your rights and duties, as well as the potential risks and liabilities associated with partnerships. If you would like to learn more, please contact us.