Partnership

How BC law treats it

The Partnership Act, RSBC 1996, c 348 defines a partnership as the relationship between persons carrying on business in common with a view to profit. No written agreement is needed. Courts look at the substance, including sharing of profits, joint control and holding out, and s. 4 sets rules for deciding whether a partnership exists (see also Backman v Canada, 2001 SCC 10). People can become partners without intending to. In a general partnership, each partner is an agent of the firm and can bind it in the ordinary course of business. Each partner is jointly liable with the others for the firm's debts, and partners can be jointly and severally liable for wrongs committed in the business. Unless the partners agree otherwise, the Act's default rules apply, such as equal sharing of profits and dissolution when a partner leaves. A general partnership carrying on business in BC must file a registration statement with the BC Registry within three months after it is formed (ss. 81 and 82). Failing to register does not stop the partnership from existing in law. A limited partnership comes into existence only when its certificate is filed under Part 3 (s. 51). Limited partners are liable only to the extent of their contribution, as long as they do not take part in managing the business. Part 6 allows limited liability partnerships. An LLP partner is generally not personally liable for partnership obligations merely because of being a partner, but remains liable for the partner's own negligence and for wrongs of others that the partner knew of and failed to take reasonable steps to prevent (s. 104). A partnership is not a separate legal entity like a company. Partners are taxed on their share of partnership income.

What it means for your business

Founders who start working together without incorporating may already be in a partnership, with unlimited personal liability and no written rules on ownership, exits or disputes. A written partnership agreement, or incorporating a company, avoids those defaults. Limited partnerships are widely used for real estate and investment funds because they combine flow-through tax treatment with limited liability for passive investors. Joint ventures should be drafted carefully to avoid being treated as partnerships. Example: Two Vancouver designers share clients and split profits without incorporating or signing anything. When a supplier sues for an unpaid $40,000 order placed by one of them, both may be personally liable as partners.

Risks and common mistakes

Operating a business with someone without realizing it is a partnership in law. Failing to register a general partnership with the BC Registry. Letting a limited partner take part in management and risk losing limited liability. Relying on the Partnership Act's default rules instead of a written agreement. Describing a joint venture as a partnership in documents and inviting partnership liability.