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

Copyright © 2004 McGraw-Hill Ryerson

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PART 4 FORMS OF BUSINESS ORGANIZATION

Chapter 16 – Law of Partnership

Prepared by Douglas H. Peterson, University of Alberta


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BASIC CHARACTERISTICS AND DIFFERENCES

SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION

Individual Two or More Individuals Separate 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


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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


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PARTNERSHIP

LIABILITY OF PARTNERSHIP TO THIRD PARTIES

PARTNERSHIPOF A, B, C,

IN CONTRACT

THIRD PARTYA

Partner ‘A’ Negotiates Contract with Third Party in Course of Partnership

Business

All Partners Bound by Contract Right of Action Against All Partners

PARTNERSHIPOF A, B, C,

IN TORT

THIRD PARTYA

Partner ‘A’ Commits Tort Against Third Party During Course of

Partnership Business

All Partners Liable for Tort of Partner ‘A’


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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


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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


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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


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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


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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


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LIABILITY FOR EMPLOYEES

Partnership firm is the employer Liable for torts of employees

committed in course of employment


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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LIMITED PARTNERSHIPS

Tax advantages Corporation can carry on business activity Limited partners have special tax

advantages


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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


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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


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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

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

Documents

duties of partners

partnership acteach

partners consentagent

partners retirement

partnernew partners

partnerretiring partners

firmsevery partner

course of employmentrights