General partnership

How BC law treats it

Under the Partnership Act, RSBC 1996, c 348, a partnership exists whenever two or more persons carry on business in common with a view to profit, whether or not they sign an agreement or register. Courts look at the substance of the relationship (Backman v Canada, 2001 SCC 10; Continental Bank Leasing Corp v Canada, [1998] 2 SCR 298). Sharing profits is evidence of a partnership but does not prove one on its own. A general partnership is not a separate legal entity. Each partner is an agent of the firm and can bind it when acting in the usual course of its business. Under section 11, every partner is liable jointly with the other partners for all debts and obligations of the firm incurred while a partner, and partners are jointly and severally liable for wrongs committed by a partner in the ordinary course of business (ss. 12 to 14). Partners also owe each other fiduciary duties. Without a partnership agreement, the Act's default rules apply, such as equal sharing of profits and losses and unanimous consent for admitting new partners or changing the nature of the business. A written agreement can replace most defaults. General partnerships carrying on trading, manufacturing or mining must file a registration statement with BC Registries within three months after formation (ss. 81 and 82). They do not file annual reports. A partnership does not pay income tax. Income is calculated at the partnership level and allocated to the partners, who are taxed on their shares (Income Tax Act, s. 96). Some partnerships must file a T5013 information return. A limited partnership or limited liability partnership, or a corporation, offers liability protection that a general partnership does not.

What it means for your business

Many small BC ventures become general partnerships by accident, when two people start working together and sharing profits without incorporating. Each partner is then personally liable for everything the business owes, including obligations a co-partner signed. A written partnership agreement, or incorporating with a shareholder agreement, protects personal assets and sets rules for decisions, profit sharing and exit. Registration with BC Registries is also required for most operating partnerships. Example: Two designers in Kelowna start a branding studio, split profits and sign a studio lease together without incorporating. When one partner signs a costly printing contract without telling the other, both are personally liable to the printer because the contract was in the ordinary course of the business.

Risks and common mistakes

Assuming no partnership exists because there is no written agreement or registration. Believing a general partnership protects partners from personal liability. Failing to file a registration statement with BC Registries within three months. Relying on default rules, such as equal profit sharing, that do not reflect the partners' deal. Thinking the partnership itself pays income tax rather than the partners.