Copyright © 2004 McGraw-Hill Ryerson Limited 1 PART 4 FORMS OF BUSINESS ORGANIZATION  Chapter 16 – Law of Partnership Prepared by Douglas H. Peterson, University of Alberta

Copyright © 2004 McGraw-Hill Ryerson Limited 2 BASIC CHARACTERISTICS AND DIFFERENCES SOLE PROPRIETORSHIPPARTNERSHIPCORPORATION IndividualTwo or More IndividualsSeparate Legal Entity Simplest Form of Organization Proprietor Alone Enters into Contract Sole Decision-Maker Relatively Easy to Transfer Interest to Another Operation is Governed by Partnership Act Each Partner An Agent of All Other Partners in Partnership Business Activity Each Partner A Manager and Decision-Maker Change in Partners (Retirement, etc.) Difficult Created and Controlled by Corporations Legislation (Federal and Provincial) Corporation Acts Through Officers and Board of Directors as Its Agents Board of Directors Manage Corporation Transfer of Share Interest A Simple Transaction

Copyright © 2004 McGraw-Hill Ryerson Limited 3 LAW OF PARTNERSHIP Historical Development Nature of a Partnership Liability of a Partnership for the Acts of a Partner Rights and Duties of Partners to One Another Dissolution of a Partnership Limited Partnership Limited Liability Partnerships (LLP) Registration of Partnerships

Copyright © 2004 McGraw-Hill Ryerson Limited 4 PARTNERSHIP LIABILITY OF PARTNERSHIP TO THIRD PARTIES PARTNERSHIP OF A, B, C, IN CONTRACT THIRD PARTY A Partner ‘A’ Negotiates Contract with Third Party in Course of Partnership Business All Partners Bound by Contract Right of Action Against All Partners PARTNERSHIP OF A, B, C, IN TORT THIRD PARTY A Partner ‘A’ Commits Tort Against Third Party During Course of Partnership Business All Partners Liable for Tort of Partner ‘A’

Copyright © 2004 McGraw-Hill Ryerson Limited 5 INTRODUCTION Partnership – a legal relationship between two or more persons for the purpose of carrying on a business with a view to a profit Excludes associations and organizations not carried on for profit Social clubs, charities, amateur groups Creditor-debtor relationship, joint ownership of property Governed by: Common law Statute – Partnership Acts

Copyright © 2004 McGraw-Hill Ryerson Limited 6 NATURE OF A PARTNERSHIP Must distinguish partnership from other forms of carrying on business Factors considered: Agreement between parties Prima facie - sharing of profits Mere profit sharing alone does not necessarily constitute a partnership View to a profit Contributed capital

Copyright © 2004 McGraw-Hill Ryerson Limited 7 CO-OWNERSHIP VS. PARTNERSHIP Co-ownership Arises in several ways Freely alienable Not an agent of other owners Personality or realty Governed by other legislation Partnership Contractual Mutual trust – need partner’s consent Agent of other partners Property is personal Subject to Partnership Act

Copyright © 2004 McGraw-Hill Ryerson Limited 8 LIABILITY Partnerships carry on business in the name of firms Every partner is an agent of the firm May bind the firm in contract Must be in in ordinary course of partnership business If not only that partner is liable Third party unaware of non-authority to bind firm Joint and several liability Liable for torts of partners

Copyright © 2004 McGraw-Hill Ryerson Limited 9 LIABILITY Assets of partnership and partners are exposed As risk management partnership agreement should clearly define duties, responsibilities and rights of each partner New partners not liable for debts incurred before date of becoming partner Retiring partners not liable for debts incurred after retirement

Copyright © 2004 McGraw-Hill Ryerson Limited 10 LIABILITY FOR EMPLOYEES Partnership firm is the employer Liable for torts of employees committed in course of employment

Copyright © 2004 McGraw-Hill Ryerson Limited 11 RIGHTS AND DUTIES OF PARTNERS TO ONE ANOTHER Set out in partnership agreement Partners within the boundaries of the law can set their own rights and duties May vary them from time to time with consent If no partnership agreement Right and duties set forth in Partnership Act

Copyright © 2004 McGraw-Hill Ryerson Limited 12 PARTNERSHIP PROPERTY Partnership Act All property and rights brought into the partnership All property acquired by partnership Is owned by the partnership Must be held and used for benefit of partnership; or In accordance with partnership agreement

Copyright © 2004 McGraw-Hill Ryerson Limited 13 PARTNERSHIP PROPERTY Land If bought by partnership title in name of partnership If bought by single partner – held in trust for partnership unless established otherwise Land treated as personal property not real property

Copyright © 2004 McGraw-Hill Ryerson Limited 14 PARTNERS RELATIONSHIP Act provides default rules in absence of an agreement Partners share equally in capital and profits Firm indemnifies partners for payments and personal liabilities in ordinary course of business Interest rates at prescribed rates No entitlement on interest to capital contribution

Copyright © 2004 McGraw-Hill Ryerson Limited 15 PARTNERS RELATIONSHIP Every partner may take part in management No partner entitled to remuneration No person can be partner without consent of others Ordinary matters decided by majority, major require consent Books kept at place of business Can’t expel a partner with a majority

Copyright © 2004 McGraw-Hill Ryerson Limited 16 PARTNERS RELATIONSHIP Partnership is a contract of utmost good faith Must perform in best interests of partnership Render an accounting Deliver up personal benefits of use of personal partnership property Not enter into positions of conflict Assignees do not step into shoes of partnership when share in partnership assigned to them Only get receipt of a share of profits

Copyright © 2004 McGraw-Hill Ryerson Limited 17 DISSOLUTION OF A PARTNERSHIP By agreement or by the Act By Agreement Period of notice required by partners If for specific term At the end of the term Death or insolvency of a partner Unless provided for otherwise By operation of law If set up for an unlawful purpose

Copyright © 2004 McGraw-Hill Ryerson Limited 18 DISSOLUTION OF PARTNERSHIP Once notice of dissolution is given Assets of firm liquidated Share of each partner determined Partner’s share distinct from assets of partnership Order of payment of assets Payment of debts to non-partners Partners advances Capital contributions Residue to partners according to partnership percentage

Copyright © 2004 McGraw-Hill Ryerson Limited 19 DISSOLUTION OF PARTNERSHIP Notice must be given to customers and the world at large Done to avoid liability Once partnership dissolved Business may continue operations only to close down business

Copyright © 2004 McGraw-Hill Ryerson Limited 20 LIMITED PARTNERSHIP When a partner can limit their liability under certain circumstances Protect personal estate from creditors of partnership Formation and operation of limited partnerships governed by legislation Not uniform throughout Canada Must have one or more general partners Cannot all be limited partners Limited means limited to amount of capital contributed

Copyright © 2004 McGraw-Hill Ryerson Limited 21 LIMITED PARTNERSHIP Only general partners may actively transact business Limited partner must take passive inactive role Take active role will be considered a general partner Limited partner’s name should not be on letterhead Cannot withdrawal capital contribution until dissolution of partnership

Copyright © 2004 McGraw-Hill Ryerson Limited 22 LIMITED PARTNERSHIP Forum of document to be filed with registry varies generally: Name Business carried on Names of general and limited partners Amount of capital contributed by each Place of business, date and term Purpose: to provide creditors and others with required information who deal with partnership

Copyright © 2004 McGraw-Hill Ryerson Limited 23 LIMITED PARTNERSHIPS Tax advantages Corporation can carry on business activity Limited partners have special tax advantages

Copyright © 2004 McGraw-Hill Ryerson Limited 24 LIMITED LIABILITY PARTNERSHIPS Special legislation whereby individual partners retain a limited liability status Unlimited liability maintained for general debts of partnership and partner’s personal negligence Partners not responsible for claims arising from negligent acts or omissions of other partners

Copyright © 2004 McGraw-Hill Ryerson Limited 25 REGISTRATION OF PARTNERSHIPS Some partnerships must register Varies by province Exempted Usually professions who are self-governing Disclosure of certain information is required Purpose: For potential third parties who may deal with the partnership

Copyright © 2004 McGraw-Hill Ryerson Limited 26 SUMMARY Relationship of utmost good faith Partners are agents of the firm and each other Joint and several liability Governed by: Partnership agreements Partnership Acts Dissolution According to the partnership agreement and the Act Partnerships must be registered Some exceptions apply Limited Partners Have limited liability