CHAPTER 02 Types of Business Organizations
Partnerships Partnership is the relationship between persons carrying on business in common with a view to profit. Partners may be individuals, corporations or other partnerships. In Canada, a partnership is not regarded as a separate legal entity from its partners. There are two principal types of partnership. In a general partnership, all of the partners can participate in the management of the business, but are exposed to unlimited liability for partnership obligations. In a limited partnership, limited partners’ liability is limited to their investment in the partnership, but they must remain passive investors and not take part in the control of the partnership business. Ontario and Québec (as well as other provinces) also permit professionals to practise through a special type of general partnership known as a limited liability partnership, which provides individual partners with a degree of protection against unlimited liability for the negligent acts of other partners. In Ontario, the governing statutes are the Partnerships Act and the Limited Partnerships Act , which define the rights and obligations of the partners between themselves and in relation to third parties. Partnership law also includes non-statutory common law and equitable principles. In Québec, partnerships are governed by the Civil Code of Québec and the Act respecting the legal publicity of enterprises , which similarly set out the rights and obligations of partners between themselves and toward third persons, as well as conditions for the creation, operation and dissolution of a partnership. The provisions of these statutes that address the rights and obligations of partners between themselves can generally be altered by agreement between the partners. Because the relationships between the partners can be
determined by agreement, great flexibility is possible in providing for such matters as capital contributions or other financing of the partnership, participation in profits and management structure. Income and losses of a partnership, although computed at the partnership level, are taxed in the hands of the partners. This tax treatment is the primary reason for using a partnership rather than a corporation, since each partner may offset its eligible share of the partnership’s business tax losses against income from other sources. GENERAL PARTNERSHIPS The main characteristic of a general partnership is the unlimited liability of each partner for the liabilities and obligations incurred by the partnership to third parties. Each partner may bind the others, unless a third party has notice that the partnership agreement restricts a partner’s authority to act on behalf of the partnership. However, a partner is generally not liable for obligations incurred before it became or after it ceased to be a partner. The main disadvantages of a general partnership are the unlimited liability of the partners and the ability of each partner to incur partnership obligations that will bind the other partners. In Ontario, all the partners of a general partnership must register the name of the partnership under the Business Names Act unless the business is carried on under the names of the partners. In Québec, a general partnership must file a declaration of registration under the Act respecting the legal publicity of enterprises . This declaration must include a French name for the purpose of carrying on business in Québec. In both Ontario and Québec, these registrations require that the partnership business and the names and addresses of the partners be disclosed. In Québec, the general partnership must file an annual declaration every year to maintain its
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