Partnerships

When two or more persons, whether individuals or corporations, carry on business together with a view to profit, this relationship is called a partnership and the individual members are called partners. A partnership is similar to a sole proprietorship in that they are both relatively inexpensive to establish and there are few legal formalities creating them. Further, the operation of the business is dependent on the individual partners themselves. Subject to the terms of any partnership agreement, should a partner die, quit or declare bankruptcy, the partnership is immediately dissolved.

In Ontario, there are three types of partnerships: general partnerships, limited liability partnerships (LLPs), and limited partnerships. In general partnerships, the liability for each partner for the debts and obligations of the business is unlimited. A limited partnership, on the other hand, has one or more general partners with unlimited liability, but also has one or more limited partners whose liability is limited to the amount that they contributed or agreed upon within a written limited partnership agreement. LLPs are a hybrid of general and limited partnerships in that each partner has full limited liability, however, only certain professionals may create an LLP.

The most common form of partnership is a general partnership. While it is less complicated and less expensive to set up, care must be taken in those chosen to become a partner. This caution is necessary because general partners can legally bind all the other partners to contracts with third parties, even without their knowledge and consent. Consequently, before forming a partnership, you must have complete faith and confidence in your proposed partner(s).

If you would prefer to limit your personal liability and make it easier to continue the business uninterrupted if one partner dies or wishes to leave the business, consider incorporation. If you do form a partnership, a partnership agreement is a necessity. That agreement should clearly define the relationship between you and your partner(s) and is essential to the smooth operation of the business. For more information to decide whether a partnership is best for you or on forming a partnership agreement, consult one of our experienced business lawyers.