Legal Brief for March, 2012

What is a Partnership?

In last month's Legal Brief we looked at the most basic form of legal structure for a business - that of a sole propriertorship.  This is the form that many people starting a business will begin with.  In this month's Brief we will look at another common form of business structure - that of a partnership.

A partnership involves two or more entities coming together to conduct business.  The partnership can be formed from individuals or corporations. In Alberta the Partnership Act regulates the creation and legal rights and obligations of partnerships.  Partnerships can be created by a written agreement between the partners, but they can also arise by verbal agreement or by conduct.

There are two basic types of partnerships - general and limited.  In a general partnership all of the partners have equal rights and liabilities.  In a limited partnership, there will be an operating partner who will have control of the business and full liability for all debts, while the limited partner will usually have a minor role in the operation of the business, and as the name implies, limited liability for any debts of the partnership.

Some of the basic principles of partnerships are as follows:

1. unless otherwise agreed by the parties, all partners are to share equally in the profits, or losses, of the partnership;

2. all partners are responsible for any debts incurred on behalf of the partnership by any one of the partners, unless that party did not have authority to create the debt and the party with whom the debt was created knew that;

3. liaibility for partnership debts is "joint and several".  This means that the partnership group as a whole is "jointly" liable for the debts of the partnership, and each individual partner is also separately, or "severally" liable for the full debts of the partnership.

There are various reasons why people will carry on their business in a partnership.  In some cases, it is less expensive for individuals to be involved in a partnership because they avoid the costs of incorporating and the maintenance costs associated with having a corporate status, or it may be that the entities involved only need to be doing business together for a limited period of time.  There may also be tax reasons that motivate individuals or corporations to do business in this form.

From my practice experience, it is very important for anyone who is involved in a partnership arrangement to have a full partnership agreement put in writing signed by all parties of the partnership.  Having an agreement in place will save considerable grief, and legal fees, if the parties choose to disband the partnership and decide to go their separate ways.

In next month's Brief we will consider a 3rd form of business structure, the corporation.