Partnership

Under Section 2 of the Partnerships Act, RSO 1990, c P.5, a partnership is "the relation that subsists between persons carrying on a business in common with a view to profit." This is a legally precise definition: all three elements must be present — carrying on business, in common, with a view to profit.

Unlike a corporation, a general partnership is not a separate legal entity in Ontario. The partnership is simply the aggregate of its partners. This distinction has significant practical consequences: partners are personally liable for partnership debts, the partnership does not pay income tax (income flows through to partners' personal returns), and the partnership dissolves or changes character when partners join or leave.

However, the Partnerships Act does give a partnership certain functional characteristics of an entity. A partnership can carry on business under a firm name, hold property in the firm name, and sue or be sued in the firm name under the Rules of Civil Procedure. But these are procedural conveniences, not true separate legal personality.

Partnerships arise by agreement — written, oral, or implied by conduct. Section 3 of the Partnerships Act provides rules for determining whether a partnership exists, including the treatment of profit-sharing arrangements (which may or may not indicate a partnership depending on context).

The most critical legal characteristic of a general partnership is that each partner is jointly and severally liable for all debts and obligations of the partnership incurred while they are a partner (Partnerships Act, s. 10-13).

What this means in practice:

• A creditor of the partnership can sue any individual partner (or all of them) for the full amount of the debt — regardless of that partner's percentage ownership
• A partner is personally liable not only for debts they personally incurred on behalf of the firm, but also for acts of their co-partners carried out in the ordinary course of business (s. 11)
• A partner can be held liable for the wrongful acts or omissions of their co-partners if those acts were committed in the ordinary course of business (s. 12)
• A new partner is not personally liable for debts incurred before they joined (s. 18(1)), but a retiring partner remains liable for debts incurred while they were a partner (unless released by creditors)

Example: If a three-person partnership has a $300,000 judgment against it and two of the partners have no personal assets, the creditor can recover the entire $300,000 from the third partner — even if that partner's "share" of the partnership is only 33.3%.

This unlimited, joint and several liability is the fundamental risk of the general partnership structure and is the primary reason most business ventures of any scale either incorporate or use a limited partnership instead.

The Partnerships Act provides default rules that govern a partnership in the absence of a written partnership agreement. Understanding these defaults is essential because many partnerships — particularly informal ones — operate without a written agreement, and parties are often surprised by what the Act imposes.

Key default rules under the Partnerships Act include:

Equal sharing of profits and losses (s. 24(1)): Each partner shares equally in the capital, profits, and losses of the firm — regardless of how much each contributed to the business.

No entitlement to remuneration (s. 24(6)): Partners are not entitled to payment for acting in the partnership business. A partner who does all the work but holds a 50/50 split with a passive partner receives no additional compensation unless the partnership agreement provides for it.

Unanimous consent required for new partners (s. 24(7)): No new partner can be introduced without the consent of all existing partners.

Dissolution on death or bankruptcy (s. 33): Subject to agreement, the partnership is dissolved by the death or bankruptcy of any partner — a disruptive default that can destroy a thriving business.

Any partner can dissolve the partnership (s. 26): In a partnership of undefined duration, any partner can dissolve the partnership by giving notice to the other partners.

Partnership property (s. 21-22): Property brought into or acquired for the partnership is partnership property and must be used for partnership purposes.

These defaults highlight why a comprehensive written partnership agreement is essential for any serious business relationship.

A written partnership agreement allows partners to override many of the Act's default rules and tailor the partnership to their specific needs. Key provisions to address:

Profit and loss sharing: Define each partner's share of profits and losses, which need not be equal. Consider whether contributions of capital, time, and expertise are being appropriately recognized.

Remuneration: Specify whether partners are entitled to salary, management fees, or draws before the remaining profit is split. This is particularly important where partners have different levels of involvement.

Decision-making: Distinguish between ordinary decisions (majority vote) and extraordinary decisions (unanimous consent). Without this, every significant business decision potentially requires all partners to agree.

Capital contributions: Document what each partner has contributed and what additional contributions may be required.

Admission of new partners: Set out the process and conditions for admitting new partners.

Withdrawal and retirement: What happens when a partner wants to leave? Is there a right of first refusal for the departing partner's interest? How is the buyout price determined?

Death and disability: Override the Act's default dissolution-on-death rule. Typically, the surviving partners are given the right to purchase the deceased partner's interest at an agreed valuation.

Non-compete and non-solicitation: Restrict departing partners from competing with the firm or soliciting clients and staff.

Dispute resolution: Mediation and arbitration clauses to resolve disagreements without disrupting the business or resorting to litigation.

Dissolution: Establish the procedure and terms for an orderly wind-up.

General partnerships in Ontario must register under the Business Names Act, RSO 1990, c B.17 if they carry on business under a firm name (i.e., a name other than the personal names of all the partners).

Under Section 2(3) of the BNA, every partnership that carries on business in Ontario under a business name is required to register that name. The filing is made through the Ontario Business Registry (OBR) at a government fee of $60 for a 5-year term.

The registration records: the firm name, the partners' names and addresses, and the nature of the business. Like a sole proprietorship registration, it does not confer exclusive rights to the name.

Failing to register when required is an offence under the BNA and, critically, prevents the partnership from suing to enforce contracts in the unregistered name (BNA, s. 7).

Note that the registration requirement is for the business name — there is no requirement to file a copy of the partnership agreement with the government. Partnership agreements remain private.

A general partnership is not a taxpayer for income tax purposes. The partnership files an information return (T5013 — Partnership Information Return) with the CRA to report the partnership's income or loss, but the partnership itself does not pay income tax.

Instead, each partner's allocated share of the partnership's income or loss flows through to the partner's own tax return and is taxed in their hands at their applicable rate. This flow-through treatment is the defining tax characteristic of partnerships and stands in contrast to corporations, where income is taxed inside the corporation first.

Advantages of flow-through taxation: - Partnership losses can be applied against a partner's other income, reducing personal tax — unlike corporate losses, which are trapped inside the corporation - Partners in low tax brackets benefit from their share of partnership income being taxed at a lower rate

Disadvantages: - Partners pay tax on their allocated share of income even if that income is not distributed — there is no tax deferral available as with a corporation - Partners at high marginal rates (up to 53.53% in Ontario) pay substantially more tax on partnership income than they would on equivalent income retained inside a corporation

Each partner reports their share of partnership income on the appropriate lines of their T1 personal return. Professional partnerships (law firms, accounting firms) typically file a T5013 annually.

Choosing between a general partnership, corporation, and limited partnership involves weighing several factors:

General partnership vs. corporation: - Partnerships have unlimited liability; corporations provide limited liability to shareholders - Partnership income flows through to partners (taxed personally); corporate income is taxed at lower corporate rates first - Partnerships have no separate legal personality; corporations are separate legal persons - Partnerships are simpler and less expensive to operate; corporations require ongoing compliance - Partnership losses flow through to partners; corporate losses are trapped

General partnership vs. limited partnership: - In a general partnership, all partners have unlimited liability and management rights - In a limited partnership, limited partners have liability capped at their investment but no management rights; only the general partner has unlimited liability and management control - Limited partnerships are commonly used for investment funds, real estate syndications, and private equity

In practice, general partnerships are most commonly used by professional service firms (law, accounting, medicine — historically) and joint ventures between related parties. Most commercial businesses of any scale incorporate rather than operate as general partnerships.

Sophie and Marcus are two architects who decide to start a practice together. They form "Smith & Clarke Architecture" as a general partnership under the Partnerships Act. They register the name under the Business Names Act for $60.

Without a written partnership agreement, the Act's defaults apply: they share profits 50/50, neither is entitled to extra pay for additional work, and the partnership dissolves if either dies.

After two years, Marcus takes on a large project that goes significantly over budget. The client sues the firm for $400,000. Because the partnership has insufficient assets, the creditor pursues Sophie personally — even though Marcus was solely responsible for the project. Sophie is jointly and severally liable for the full $400,000.

Had Sophie and Marcus incorporated, Sophie would not be personally liable for this judgment (absent a personal guarantee). This illustrates the core liability risk of the general partnership structure.