Partnership

Many 50/50 shareholders refer to themselves as “partners”, when in fact each owns half of the shares in a company. In that scenario, the company owns the business. Partners, on the other hand, hold a direct ownership interest in the business. It is important to distinguish between 50/50 shareholders and partnerships as the law governs each of them differently. Learn more about 50/50 Shareholders on our website. The Partnerships Act, RSO 1990, c P.5 and the common law governs partnerships as discussed below.

What Exactly is a Partnership?

A partnership is a relationship where two or more persons are carrying out a business in common with a view of profit, as per s. 2 of the Partnerships Act. Whether a partnership has been formed can be the subject of litigation.

It is not always clear whether a partnership has been formed because an agreement to create a partnership may be implied rather than express. The parties may choose to expressly state that they are partners, or the relationship that they create through their words and conduct may demonstrate an intention to become partners. In determining the formation of a partnership, the courts will consider the totality of the circumstances rather than a checklist.

Joint ownership of property, alone, does not form a partnership. The courts will also consider things such as the contribution of money, property, effort, knowledge, skill or other assets to a joint undertaking, the sharing of profits and losses, a mutual right of control, income tax returns filed as a partnership, and joint bank accounts.

A partnership can be formed before the intended business starts operating, or where the terms of a partnership agreement have not been completed.

Unlike a corporation, a partnership is not a separate legal entity from its partners. However, a partnership in Ontario can be used using the firm name of the partnership.

Private Advantage at the Expense of the Partnership

Partners owe each other fiduciary duties. That means that a partner cannot obtain a private advantage at the expense of the partnership. In every transaction affecting a partnership, the partners are bound to do their best for the partnership itself and share any benefits with the other partners.

Further, section 28 of the Partnerships Act provides that partners are bound to render true accounts and full information of all things affecting a partnership. It should be noted that the mutual rights and duties of the partners can be varied by the consent of all the partners which may be expressly set out in a Partnership Agreement or inferred from their course of dealing, under section 24 of the Partnerships Act. These rights and duties come to an end with the dissolution of the partnership.

The End of a Partnership

Given that the rights and obligations of partners end when the partnership is dissolved, whether a partnership has in fact come to an end can be the subject matter of a lawsuit.  Section 32 of the Partnerships Act provides the following:

32   Subject to any agreement between the partners, a partnership is dissolved:

1. if entered into for a set term, by the expiration of that term;
2. if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking; or
3. if entered into for an undefined time, by a partner giving notice to the other or others of his or her intention to dissolve the partnership, in which case the partnership is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is so mentioned, as from the date of the communication of the notice.

Final Thoughts

A partnership agreement is recommended when forming a partnership, as it can outline the nature of the relationship, the obligations and duties adopted by the partners, notice requirements, termination of the partnership and the obligations that remain at the time of termination. It can also deal with how disputes can be resolved and valuation on termination. If these various aspects of the partnership are defined in a partnership agreement, that will help to avoid costly litigation regarding what the partners intended.