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Which business form is right for you? Find out more about Partnerships.

07 September 2016

partnershipPartnerships

Overview

A partnership is a business form in which two or more persons carry on business in common with a view to profit. The B.C. Partnership Act regulates partnerships in B.C. In principle, a general partnership is an equal relationship. The partners may enter into a partnership agreement setting out the mutual rights and duties of each partner. However,

if partners do not do so, they will be bound by the default partnership agreement set out in the B.C. Partnership Act.

Liability

In law, partners and partnerships are not treated as separate legal entities. As a result, each partner is jointly and severally liable for the liabilities of the partnership. Consequently, the acts of one partner in conducting the business, even if not authorized by the others, may bring liability upon them all. As well, the personal assets of each partner and the business assets of the partnership are equally available to both personal creditors and business creditors to satisfy any claims. Partners are as agents for one another, and owe each other a fiduciary duty.   

Potential Advantages

  • Easy formation
  • Easy dissolution
  • Inexpensive to form and dissolve
  • Shared talent and resources
  • Flexibility in terms of fundraising
  • Flexibility in terms of choosing how to use business profits and assets
  • All profits go to the partners

Potential Disadvantages



  • Joint decision-making
  • Difficult to find appropriate partner(s)
  • Potential for conflict between partners
  • Joint and several liability
  • On death of a partner, the partnership dissolves. It is not a separate legal entity and so does not benefit from continued existence.

Taxation Consequences

Under income tax law, the partners and the partnership are not treated as separate legal entities. This means that partnerships are a flow-through tax entity – the partnership income and losses flow through to the partners, and there is no separate tax rate or income tax return for the partnership. Income tax law requires the partners to calculate the income earned or losses incurred by the partnership, to allocate the income or losses to the partners and then to include their share of the income or losses in their personal income tax returns. Canada and B.C. have a progressive tax rate structure for individuals. Meaning the tax rates increase as taxable income increases.

Creation

No formal steps are required to form a partnership. Typically a partnership is created when two or more persons enter into a partnership agreement that sets out the terms of the partnership. However, a court may find that a partnership exists between two or more persons because of their relationship and the indicia of a partnership even if the persons did not enter into a partnership agreement and did not intend to create a partnership. The funding for a partnership comes from the equity of the partners or debt from others.  

Dissolution

A general partnership that was entered into for an undefined time may be dissolved by any partner giving notice to the other partner(s) of his or her intention to dissolve the partnership. Note that there is automatic dissolution in certain circumstances, such as the death of a partner or bankruptcy.

The Business Law Clinic

This information has been prepared by students at the UVic Business Law Clinic. The BLC provides free business legal information to a wide range of business owners, entrepreneurs and non-profit organizations that operate within British Columbia. For more information or to book an appointment, please leave a message on the BLC's voicemail at 250-472-4522, send an email to This email address is being protected from spambots. You need JavaScript enabled to view it. or send a fax to 250-721-8146.

Read 1662 times Last modified on Wednesday, 07 September 2016

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