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Copyright © 2004 McGraw-Hill Ryerson
Limited 1
PART 4 FORMS OF BUSINESS ORGANIZATION
Chapter 16 – Law of Partnership
Prepared by Douglas H. Peterson, University of Alberta
Copyright © 2004 McGraw-Hill Ryerson
Limited 2
BASIC CHARACTERISTICS AND DIFFERENCES
SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION
Individual Two or More Individuals Separate Legal Entity
Simplest Form of Organization
Proprietor Alone Enters into Contract
Sole Decision-Maker
Relatively Easy to Transfer Interest to Another
Operation is Governed by Partnership Act
Each Partner An Agent of All Other Partners in Partnership Business Activity
Each Partner A Manager and Decision-Maker
Change in Partners (Retirement, etc.) Difficult
Created and Controlled by Corporations Legislation (Federal and Provincial)
Corporation Acts Through Officers and Board of Directors as Its Agents
Board of Directors Manage Corporation
Transfer of Share Interest A Simple Transaction
Copyright © 2004 McGraw-Hill Ryerson
Limited 3
LAW OF PARTNERSHIP
Historical Development Nature of a Partnership Liability of a Partnership for the Acts of
a Partner Rights and Duties of Partners to One
Another Dissolution of a Partnership Limited Partnership Limited Liability Partnerships (LLP) Registration of Partnerships
Copyright © 2004 McGraw-Hill Ryerson
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PARTNERSHIP
LIABILITY OF PARTNERSHIP TO THIRD PARTIES
PARTNERSHIPOF A, B, C,
IN CONTRACT
THIRD PARTYA
Partner ‘A’ Negotiates Contract with Third Party in Course of Partnership
Business
All Partners Bound by Contract Right of Action Against All Partners
PARTNERSHIPOF A, B, C,
IN TORT
THIRD PARTYA
Partner ‘A’ Commits Tort Against Third Party During Course of
Partnership Business
All Partners Liable for Tort of Partner ‘A’
Copyright © 2004 McGraw-Hill Ryerson
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INTRODUCTION
Partnership – a legal relationship between two or more persons for the purpose of carrying on a business with a view to a profit Excludes associations and organizations
not carried on for profit Social clubs, charities, amateur groups Creditor-debtor relationship, joint ownership of
property Governed by:
Common law Statute – Partnership Acts
Copyright © 2004 McGraw-Hill Ryerson
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NATURE OF A PARTNERSHIP
Must distinguish partnership from other forms of carrying on business
Factors considered: Agreement between parties Prima facie - sharing of profits
Mere profit sharing alone does not necessarily constitute a partnership
View to a profit Contributed capital
Copyright © 2004 McGraw-Hill Ryerson
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CO-OWNERSHIP VS. PARTNERSHIP
Co-ownership Arises in several
ways Freely alienable Not an agent of other
owners Personality or realty Governed by other
legislation
Partnership Contractual Mutual trust – need
partner’s consent Agent of other
partners Property is personal Subject to
Partnership Act
Copyright © 2004 McGraw-Hill Ryerson
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LIABILITY
Partnerships carry on business in the name of firms Every partner is an agent of the firm May bind the firm in contract
Must be in in ordinary course of partnership business
If not only that partner is liable Third party unaware of non-authority to bind
firm
Joint and several liability Liable for torts of partners
Copyright © 2004 McGraw-Hill Ryerson
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LIABILITY
Assets of partnership and partners are exposed
As risk management partnership agreement should clearly define duties, responsibilities and rights of each partner
New partners not liable for debts incurred before date of becoming partner
Retiring partners not liable for debts incurred after retirement
Copyright © 2004 McGraw-Hill Ryerson
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LIABILITY FOR EMPLOYEES
Partnership firm is the employer Liable for torts of employees
committed in course of employment
Copyright © 2004 McGraw-Hill Ryerson
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RIGHTS AND DUTIES OF PARTNERS TO ONE ANOTHER
Set out in partnership agreement Partners within the boundaries of the law
can set their own rights and duties May vary them from time to time with
consent If no partnership agreement
Right and duties set forth in Partnership Act
Copyright © 2004 McGraw-Hill Ryerson
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PARTNERSHIP PROPERTY
Partnership Act All property and rights brought into the
partnership All property acquired by partnership
Is owned by the partnership Must be held and used for benefit of
partnership; or In accordance with partnership agreement
Copyright © 2004 McGraw-Hill Ryerson
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PARTNERSHIP PROPERTY
Land If bought by partnership title in name of
partnership If bought by single partner – held in trust
for partnership unless established otherwise
Land treated as personal property not real property
Copyright © 2004 McGraw-Hill Ryerson
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PARTNERS RELATIONSHIP
Act provides default rules in absence of an agreement Partners share equally in capital and
profits Firm indemnifies partners for payments
and personal liabilities in ordinary course of business
Interest rates at prescribed rates No entitlement on interest to capital
contribution
Copyright © 2004 McGraw-Hill Ryerson
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PARTNERS RELATIONSHIP
Every partner may take part in management
No partner entitled to remuneration No person can be partner without consent
of others Ordinary matters decided by majority,
major require consent Books kept at place of business Can’t expel a partner with a majority
Copyright © 2004 McGraw-Hill Ryerson
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PARTNERS RELATIONSHIP
Partnership is a contract of utmost good faith
Must perform in best interests of partnership Render an accounting Deliver up personal benefits of use of personal
partnership property Not enter into positions of conflict Assignees do not step into shoes of partnership
when share in partnership assigned to them Only get receipt of a share of profits
Copyright © 2004 McGraw-Hill Ryerson
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DISSOLUTION OF A PARTNERSHIP
By agreement or by the Act By Agreement
Period of notice required by partners If for specific term
At the end of the term Death or insolvency of a partner
Unless provided for otherwise By operation of law
If set up for an unlawful purpose
Copyright © 2004 McGraw-Hill Ryerson
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DISSOLUTION OF PARTNERSHIP
Once notice of dissolution is given Assets of firm liquidated Share of each partner determined
Partner’s share distinct from assets of partnership
Order of payment of assets Payment of debts to non-partners Partners advances Capital contributions Residue to partners according to partnership
percentage
Copyright © 2004 McGraw-Hill Ryerson
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DISSOLUTION OF PARTNERSHIP
Notice must be given to customers and the world at large Done to avoid liability
Once partnership dissolved Business may continue operations only to
close down business
Copyright © 2004 McGraw-Hill Ryerson
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LIMITED PARTNERSHIP
When a partner can limit their liability under certain circumstances Protect personal estate from creditors of
partnership Formation and operation of limited
partnerships governed by legislation Not uniform throughout Canada
Must have one or more general partners Cannot all be limited partners Limited means limited to amount of capital
contributed
Copyright © 2004 McGraw-Hill Ryerson
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LIMITED PARTNERSHIP
Only general partners may actively transact business Limited partner must take passive inactive
role Take active role will be considered a general
partner Limited partner’s name should not be on
letterhead Cannot withdrawal capital contribution
until dissolution of partnership
Copyright © 2004 McGraw-Hill Ryerson
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LIMITED PARTNERSHIP
Forum of document to be filed with registry varies generally: Name Business carried on Names of general and limited partners Amount of capital contributed by each Place of business, date and term
Purpose: to provide creditors and others with required information who deal with partnership
Copyright © 2004 McGraw-Hill Ryerson
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LIMITED PARTNERSHIPS
Tax advantages Corporation can carry on business activity Limited partners have special tax
advantages
Copyright © 2004 McGraw-Hill Ryerson
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LIMITED LIABILITY PARTNERSHIPS
Special legislation whereby individual partners retain a limited liability status Unlimited liability maintained for general
debts of partnership and partner’s personal negligence
Partners not responsible for claims arising from negligent acts or omissions of other partners
Copyright © 2004 McGraw-Hill Ryerson
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REGISTRATION OF PARTNERSHIPS
Some partnerships must register Varies by province
Exempted Usually professions who are self-governing
Disclosure of certain information is required
Purpose: For potential third parties who may deal with the partnership
Copyright © 2004 McGraw-Hill Ryerson
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SUMMARY Relationship of utmost good faith
Partners are agents of the firm and each other Joint and several liability
Governed by: Partnership agreements Partnership Acts
Dissolution According to the partnership agreement and the
Act Partnerships must be registered
Some exceptions apply Limited Partners
Have limited liability