The Three Partnership Arrangements: Which Is Best For Your Business
There are three types of Partnerships:
- General Partnerships;
- Limited Partnerships; and,
- Limited Liability Partnerships.
Each of these arrangements have their own statutory requirements and liabilities that mandate the rights and responsibilities of individual partners.
General Partnership
A General Partnership is governed by the Partnerships Act (Ontario) (the “OPA”), and is the association of two or more people who own and manage a business for profit (OPA, s. 2). In this arrangement, the rights and responsibilities are equally divided between all partners.
There are three main criteria in order to be classified as a General Partnership:
- The association must be carrying on a business;
- With a view to profit; and,
- Have an agreement to carry on business in common to share profit.
Each individual partner has the ability to bind the partnership which, in turn, means the liability in a General Partnership is joint and several: Each individual partner assumes full responsibility for the debts and other obligations of the partnership (OPA, s. 13). These liabilities are imposed after an individual becomes a partner, however, a partner will remain liable for anything incurred prior to the point they are no longer a partner, unless discharged by way of an agreement with the remaining partners and or creditors.
Similar to the director of a corporation, each individual partner must exercise the duty of loyalty and good faith; a partner must account for any benefit derived from a transaction relating to the partnership, and is prohibited from carrying on business that competes with the partnership without the consent of the other partners (OPA, s. 29-30).
Limited Liability Partnership
Limited Liability Partnerships (“LLPs”) are a mix of the general partnership and limited partnership arrangements, and are also governed by the OPA. Most forms of LLPs are carried on for the purpose of practising a profession, hence, a minimum amount of liability insurance must be maintained (OPA, s. 44.2). Further, the name must be registered under the Business Names Act and must contain LLP, L.L.P. or s.r.l. (OPA, s. 44.3)
LLPs utilize the existing assets of the firm to satisfy debts, obligations and claims. Regardless, an individual partner may still be held personally liable on account of their own negligence, or for the negligence of the employees working under their direct supervision and control (OPA, s. 44.1(3)).
Limited Partnership
Limited Partnerships are governed by the Limited Partnerships Act (Ontario) (the “OLPA”), and are formed by filing a declaration with the Ministry of Government Services; this declaration must be signed by all the general partners that form part of this entity, and needs to be renewed every five years by filing a new declaration (OLPA, s. 3).
This arrangement can include both general partners and limited partners, however there must be at least one general partner operating the partnership (OLPA, s. 2).
The general partner in a Limited Partnership is exposed to full, personal liability for the business’s debts and obligations, however, they do retain the right to control the business (OLPA, s. 8). A limited partner’s liability is limited to the amount of money and property contributed, however they do not participate in the management decisions of the business (OLPA, s. 9).
Regardless of liability or control, both general and limited partners have a right to share in the profits of the business unless the “payment would reduce the assets of the limited partnership to an amount insufficient to discharge the liabilities” (OLPA, s. 11).
Take-Away
When considering whether to enter into a partnership, learn the differences between each arrangement to know whether to carry on business as a partnership, or whether another entity is more tailored to your business.
If already carrying on business as a partnership, carefully review the relevant statute and existing partnership agreement that governs your arrangement. If you currently do not have a partnership agreement, consider drafting one that clearly lays out controlling, entering and exiting the partnership. See our related our related blog from September 16, 2015: “How to set up a business partnership agreement”.
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If you wish to learn more about partnerships and the arrangement most tailored to your business plan, contact our office today for your free initial consultation.
We look forward to hearing from you.
Disclaimer: This article is for informational purposes only and does not provide legal advice, nor does it create a solicitor-client relationship with you or any other reader.
