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Difference between revisions of "Forming a Partnership"
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Forming a Partnership (view source)
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If you’re starting a business with someone else, a '''partnership''' is an option to consider. They can work well for real estate businesses, professionals and new businesses. Learn what’s involved. | If you’re starting a business with someone else, a '''partnership''' is an option to consider. They can work well for real estate businesses, professionals and new businesses. Learn what’s involved. | ||
== | ==What you should know== | ||
===Pros and cons of a partnership=== | ===Pros and cons of a partnership=== | ||
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===How a general partnership works=== | ===How a general partnership works=== | ||
The ''[ | The ''[https://www.canlii.org/en/bc/laws/stat/rsbc-1996-c-348/latest/rsbc-1996-c-348.html Partnership Act]'' establishes three types of partnerships: | ||
*general partnerships | *general partnerships | ||
*limited partnerships | *limited partnerships | ||
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General partners are each '''personally responsible''' for the partnership’s debts. This is true for both active and inactive partners in the business. | General partners are each '''personally responsible''' for the partnership’s debts. This is true for both active and inactive partners in the business. | ||
To show how a general partnership works, suppose that you and Lin borrow $10,000 to set up a shop. Your business doesn’t do well, and the partnership cannot repay the loan. The bank can ask you and Lin to pay back $5,000 each. But if Lin can’t or won’t pay their share, the bank can sue you alone for the whole $10,000. It would then be up to you to try to get Lin’s share from them. | To show how a general partnership works, suppose that you and Lin borrow $10,000 to set up a shop. Your business doesn’t do well, and the partnership cannot repay the loan. The bank can ask you and Lin to pay back $5,000 each. But if Lin can’t or won’t pay their share, the bank can sue you alone for the whole $10,000. It would then be up to you to try to get Lin’s share from them. | ||
And if you don’t have enough to repay the debt, the bank could take your personal assets — such as your house or car — even though they are not used in the business. | And if you don’t have enough to repay the debt, the bank could take your personal assets — such as your house or car — even though they are not used in the business. | ||
In contrast, company shareholders are liable for company debts only if they have personally guaranteed the company’s debts. | In contrast, company shareholders are liable for company debts only if they have personally guaranteed the company’s debts. | ||
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Each general partner is an agent for both the partnership and the other partners. You and Lin can both make contracts for the partnership that legally bind all the partners. If Lin signs a contract with Jane Jones for supplies for the partnership business, you, Lin, and the partnership must each fulfill the contract, whether you agree with it or not. | Each general partner is an agent for both the partnership and the other partners. You and Lin can both make contracts for the partnership that legally bind all the partners. If Lin signs a contract with Jane Jones for supplies for the partnership business, you, Lin, and the partnership must each fulfill the contract, whether you agree with it or not. | ||
And any partnership agreement between you and Lin cannot limit your responsibility to people who innocently sign a deal with Lin, believing Lin is authorized to act for the partnership. | And any partnership agreement between you and Lin cannot limit your responsibility to people who innocently sign a deal with Lin, believing Lin is authorized to act for the partnership. | ||
===Duties general partners owe one another=== | ===Duties general partners owe one another=== | ||
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'''Limited partnerships''' are mainly for investors who want to invest in a partnership business, but who don’t want to run the business. If you’re an investor only, you could be a limited partner and you would be responsible only for the debts of the partnership up to the amount of money you invested or agreed to invest. This is true if you don’t help manage the partnership. But if you help manage the business, then you would have the same liability as if you were a partner in a general partnership. | '''Limited partnerships''' are mainly for investors who want to invest in a partnership business, but who don’t want to run the business. If you’re an investor only, you could be a limited partner and you would be responsible only for the debts of the partnership up to the amount of money you invested or agreed to invest. This is true if you don’t help manage the partnership. But if you help manage the business, then you would have the same liability as if you were a partner in a general partnership. | ||
A limited partnership must have at least one general partner who has the usual unlimited personal liability described earlier. Usually, the general partner is a company incorporated just for that purpose, so that its shareholders aren’t personally liable for the obligations of the company (see our information on [ | A limited partnership must have at least one general partner who has the usual unlimited personal liability described earlier. Usually, the general partner is a company incorporated just for that purpose, so that its shareholders aren’t personally liable for the obligations of the company (see our information on [https://dialalaw.peopleslawschool.ca/incorporating-a-company/ companies]). The general partner is the only partner who can manage the business, so the shareholders who have most of the voting shares of a general partner company also control the management of the partnership business. | ||
===A limited liability partnership can limit your liability=== | ===A limited liability partnership can limit your liability=== | ||
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===Income tax payable by a partnership=== | ===Income tax payable by a partnership=== | ||
A partnership doesn’t have to pay any income tax on its profits. But each partner must pay income tax on their share of partnership profits. | A partnership doesn’t have to pay any income tax on its profits. But each partner must pay income tax on their share of partnership profits. | ||
If a partnership loses money, the losses are divided among the partners in the same way as profits would be. For income tax purposes, it’s as though each partner had lost that money running their own business. | If a partnership loses money, the losses are divided among the partners in the same way as profits would be. For income tax purposes, it’s as though each partner had lost that money running their own business. | ||
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===Ending a partnership=== | ===Ending a partnership=== | ||
Any partner can end a partnership any time by giving notice to all the other partners — unless the partnership agreement says otherwise. Alternatively, a partnership agreement can set a fixed term for the partnership, meaning it automatically ends after a certain time, or after a task or project ends. | Any partner can end a partnership any time by giving notice to all the other partners — unless the partnership agreement says otherwise. Alternatively, a partnership agreement can set a fixed term for the partnership, meaning it automatically ends after a certain time, or after a task or project ends. | ||
When the partnership is over, | When the partnership is over, [https://www2.gov.bc.ca/gov/content/employment-business/business/managing-a-business/permits-licences/businesses-incorporated-companies/proprietorships-partnerships/dissolution you file a '''dissolution of partnership registration'''] with the BC Registrar of Companies. At that point, your ongoing liabilities end. | ||
====Disputes between partners==== | ====Disputes between partners==== | ||
[https://www.canlii.org/en/bc/laws/stat/rsbc-1996-c-348/latest/rsbc-1996-c-348.html Under the ''Partnership Act''], a partner cannot be expelled from a partnership, even by a majority vote, unless the power to do so is in a partnership agreement. If no expulsion power is in the partnership agreement, the only option would be to dissolve the partnership. | |||
==Form the partnership== | ==Form the partnership== | ||
===Step 1. Choose your partners carefully=== | ===Step 1. Choose your partners carefully=== | ||
You should be partners only with people you trust and have confidence in. | You should be partners only with people you trust and have confidence in. | ||
===Step 2. Make a partnership agreement=== | ===Step 2. Make a partnership agreement=== | ||
A carefully drafted contract called a '''partnership agreement''' can be a very useful planning tool and help your partnership run smoothly. It can cover things like: | A carefully drafted contract called a '''partnership agreement''' can be a very useful planning tool and help your partnership run smoothly. It can cover things like: | ||
*Will you share the profits 50/50? What if one of you puts up more money at the start than the other? | * Will you share the profits 50/50? What if one of you puts up more money at the start than the other? | ||
*Will you share equally in the losses? | * Will you share equally in the losses? | ||
*Who will manage the business? (If you’re going to run the store and expect to get a salary, this should be included in your agreement or in a separate employment agreement.) | * Who will manage the business? (If you’re going to run the store and expect to get a salary, this should be included in your agreement or in a separate employment agreement.) | ||
*How much money or property (for example, equipment) will each partner contribute, and when will it have to be paid? | * How much money or property (for example, equipment) will each partner contribute, and when will it have to be paid? | ||
*How will decisions be made? By majority vote, or unanimous decision? (You could agree to make some decisions one way, and other decisions another way.) | * How will decisions be made? By majority vote, or unanimous decision? (You could agree to make some decisions one way, and other decisions another way.) | ||
*How will new partners be brought into the business, and how can you get rid of a partner or leave the partnership if you must? | * How will new partners be brought into the business, and how can you get rid of a partner or leave the partnership if you must? | ||
*How will you end the partnership when the time comes, and who’ll get what? | * How will you end the partnership when the time comes, and who’ll get what? | ||
*What happens when a partner doesn’t live up to their obligations? | * What happens when a partner doesn’t live up to their obligations? | ||
Verbal partnership agreements or hand-shake agreements are enforceable, but they can pose problems. Partnership agreements should be in writing, dated, and signed by all parties, so you can more easily prove its terms and have more certainty in your business. The best time to create a partnership agreement is early, before disagreements arise and become unsolvable. | Verbal partnership agreements or hand-shake agreements are enforceable, but they can pose problems. Partnership agreements should be in writing, dated, and signed by all parties, so you can more easily prove its terms and have more certainty in your business. The best time to create a partnership agreement is early, before disagreements arise and become unsolvable. | ||
===Step 3. Register the partnership=== | ===Step 3. Register the partnership=== | ||
Limited partnerships and limited liability partnerships must be registered with the Registrar of Companies. The | Limited partnerships and limited liability partnerships must be registered with the Registrar of Companies. The '[https://www.canlii.org/en/bc/laws/stat/rsbc-1996-c-348/latest/rsbc-1996-c-348.html 'Partnership Act''] has a list of the documents that must be filed to create these partnerships. General partnerships should be registered, but they still exist even if you don’t register them. | ||
You should let the Registrar know if any information on your registration changes (for example, if a partner joins or leaves, or if your address changes). | You should let the Registrar know if any information on your registration changes (for example, if a partner joins or leaves, or if your address changes). | ||
You must pay a fee to register your partnership with the Registrar of Companies and to have the Registrar search the corporate records to make sure someone else isn’t using your partnership name. Depending on the type of partnership, there are procedures for using the partnership name and address. | You must pay a fee to register your partnership with the Registrar of Companies and to have the Registrar search the corporate records to make sure someone else isn’t using your partnership name. Depending on the type of partnership, there are procedures for using the partnership name and address. | ||
If your partnership is for trading, manufacturing, or mining purposes, or is a limited partnership or a limited liability partnership, you must also file other information and documents with the provincial government. | If your partnership is for trading, manufacturing, or mining purposes, or is a limited partnership or a limited liability partnership, you must also file other information and documents with the provincial government. | ||
== | ==Who can help== | ||
===With more information=== | ===With more information=== | ||
