Imagine this:  One evening while watching the TV show, Dragon’s Den, a spark of entrepreneurial inspiration suddenly dawns over you.  Your excitement grows and you know you have just come up with the next big thing.   The next day, unable to contain your growing excitement, you decide to share your idea with your close friend.  With your friend also loving the idea, the two of you then make the decision to turn your idea into a business venture. Presto, welcome to the world of business partnership.  This article will review some of the basic principles and consequences of business partnerships.

There are a various types of partnership structures, such as limited partnerships and limited liability partnerships, however, this article will focus on what is known as the “general partnership”.  This is the most common form of business partnership new start-up entrepreneurs will find themselves involved in (whether they realize it or not).

Partnerships are governed in Nova Scotia by a piece of legislation called the Partnership Act.  In this Act, a partnership is defined as a relation between two or more people carrying on business in common with a view to profit. This means that a partnership can be found between two or more people by operation of law, even if they don’t intend to be, “business partners”.

Why does this matter you may ask?  This is a good question.  This becomes important consideration for entrepreneurs for various reasons, which include the fact that in the eyes of the law, each partner is an agent of the others with respect to the business.  This means that any partner has the potential to bind the partnership (and therefore affect the liability of the partners) in contract, whether or not the other partners knew of, or approved the contract.  It also means that each partner is responsible for the wrongful or negligent acts of other partners in relation to the partnership business.

Like a sole proprietorship (which I discussed in last month’s article), a partnership is an unincorporated business structure.  That means that there is no legal separation between the business and the business partners.  This can become quite significant in terms of risk and personal liability, as the individual partners’ personal assets may be available to satisfy creditors for any liabilities of the partnership.

Partners in a general partnership have unlimited joint and several liability.  This means that if one partner does not have sufficient assets available to satisfy his/her ‘share’ of liability, other partners’ can be held responsible for more than their equal share of any losses or liability, and their personal assets available to satisfy such liability.

Pursuant to the Partnership Act (Nova Scotia), partners in a general partnership have some default rights which are found in sections 22-34 of the Act.  These default rights include the right of all partners to share equally in the capital and profits, as well as the requirement to contribute equally, its share toward the losses of the business.

By default, partners are also equally entitled to participate in the management of the business, and all existing partners must consent to new partners being admitted into the partnership, and various other rights.

Understandably, there are often situations where an “equal” partnership will not be desired, or expected.  Some examples of where such situations may arise include where there are unequal contributions made to the business by each of the partners of money, business idea / concept, work, planning, or other value.  In these situations it may be in the best interest or desired by the partners to change the default rights each under the Act in order to more accurately reflect their intent with respect to their partnership.  In fact, section 22 of the Act, specifically provides that the default rights may be contracted out of by agreement of the partners.

One common way of varying the default partnership rights is by entering into a written contract called a partnership agreement.  Partnership agreements come in many forms, but it is to retain the professional advice of a lawyer in order to prepare an agreement that is legally valid, enforceable.  If there are any deficiencies or ambiguities in an agreement, the agreement may not be enforceable should a dispute arise.  A properly prepared partnership agreement will accurately and clearly reflect what the partners intended and agreed to in deciding to become business partners.  It is also recommended that this agreement be put in place before or as close to the commencement of business as possible.

If you or your business partner are status Indians in Canada, there are various issues you will want to seek legal advice on.  The advice you receive will depend on your unique circumstances, but among the various items to be flagged and discussed with your lawyer will likely be taxation and liability.

Issues Regarding Indian Status

The Indian Act (Canada) has provisions that deal with taxation of status Indians in s. 87.  Depending on the circumstances, there are certain instances where the s. 87 exemption may apply to business income to the individual partners.

The Act also contains provisions in s. 89 that protect certain assets owned by status Indians, from seizure.

Again, as these issues can be complex, and depend on the individual facts of each case, it is important that you seek the professional legal advice of a lawyer to get the answers you need in order to make informed decisions.  The consequences could be very costly otherwise.

This article was intended to be a brief and general discussion, and is NOT intended to be legal advice.  As each situation varies, and it is recommended that entrepreneurs seek the advice of a properly qualified lawyer.  This will help entrepreneurs to be more informed, and equipped to make decisions that will help them avoid potentially costly mistakes as they move forward toward achieving their business dreams and goals.

Garnet Brooks is a Business Lawyer, practicing corporate law and commercial law in Halifax.  Click to Contact Garnet.