- What is a General Partnership?
- June 23, 2015 | Author: Allison Godey
- Law Firm: Singleton Urquhart LLP - Vancouver Office
- In the previous two articles in this series (see Letter of the Law, Summer 2014 and Winter 2014), we discussed some of the advantages and disadvantages of incorporating a company and carrying on business as a sole proprietorship. In this last article, we consider the pros and cons of operating a business as a general partnership.
General partnerships are relatively simple to form. As with sole proprietorships, there are no formal requirements for establishing one—it comes into existence when two or more partners start to carry on a business together with the intention of earning profits.
The British Columbia Partnership Act provides that the receipt by a person of a share of the profits of a business is proof, in the absence of evidence to the contrary, that he or she is a partner in the business.
Maintaining the existence of a general partnership is also easy. Partnerships involved in trading, manufacturing and mining must register their names with the British Columbia Corporate Registry and must obtain any business licences required to carry on the partnerships’ business.
There are no other requirements for maintaining a general partnership. A general partnership does not need to file annual reports with the Corporate Registry, nor does it have to produce financial statements.
In addition to the ease with which a general partnership can be formed and maintained, there are other advantages to carrying on business in this manner. General partnerships may offer tax advantages to their partners because it is possible to apply the business losses of the partnership against other sources of personal income earned by the partners.
Partners do not have to enter into a written general partnership agreement since the Partnership Act sets out various rules that govern the relationship among partners and between partners and third parties. Importantly, the Partnership Act provides that each partner is personally liable for the entirety of the partnership’s business obligations, regardless of any distribution agreed to by the partners.
Furthermore, each partner is treated as an agent of the partnership so the actions of one partner bind the partnership as long as they are carried out in connection with the partnerships’ business.
The rules set forth in the Partnership Act that govern the relationship between partners and third parties are compulsory and may not be altered. However, the rules with respect to the relationship among partners may be amended by a written agreement. Thus, although a general partnership agreement is not necessary, one is recommended where partners wish to alter the rights and duties owed to one another under the Partnership Act.
There are also other matters that are not dealt with in the Partnership Act, such as how new partners will be admitted into the partnership and which events, if any, will cause a partnership to dissolve.
Since general partnerships impose personal liability on partners for the losses of the business, as well as the wrongful acts of their partners in certain situations, carrying on business in this manner may not be suitable in all instances.
If partners are not confident in one another, or if the nature of the partnership’s business is likely to expose partners to liability, then it may be more appropriate to carry on business as a limited partnership or a limited liability partnership. Both of these alternative forms of partnership limit the liability imposed on some or all partners. Consequently, before choosing which type of partnership to employ, we recommend that you seek legal advice.