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Do you have a business partner or partners? -this article outlines the who, what, where, when and why of the default form of business in British Columbia who do not formally incorporate - the general partnership.
According to British Columbia’s Ministry of Jobs, Trade & Technology[1] there were a total of 501,300 businesses in British Columbia in 2017; of these a full 493,100 businesses (98 per cent) were considered small businesses with fewer than 50 employees (and 302,700 of these businesses (60 per cent) were self-employed individuals with no employees). According to B.C.’s Ministry of Jobs, Trade & Technology, small business in B.C. accounts for 35 per cent of overall gross domestic product (GDP).
Clearly, small business owners and the self-employed represent a significant portion of business conducted in British Columbia.
Usually long before an entrepreneur contacts a lawyer, if they ever do, they have considered the what (as in what business they wish to pursue) and the question of why they want to start a new business. One of the first questions often asked when finally seeking advice is how should the business be structured – more likely, should I incorporate my business or not?
For this series we will set aside consideration of specialized subsets of the structures below like not-for-profits, societies, cooperatives, community contribution companies, unlimited liability companies (ULCs) and business required to be formed under particular statutes.
Generally, there are four potential business structures to choose (or not choose, in some circumstances) from:
Sole Proprietorship
General Partnership
Limited Partnership (see here)
Corporation
Below, we will now consider the general partnership.
Often two or more entrepreneurs will contact Endeavor Law and refer to one another as “partners” or “business partners” and speak about a partnership for some sort of existing or proposed business undertaking. The Partnership Act (British Columbia) defines partnership as “the relation which subsists between persons carrying on business in common with a view of profit” - which is more or less similar to the definition given to a partnership under the common law and the definition used by the Canada Revenue Agency. If you are carrying on a business with other persons without incorporating you are probably a partnership and you may even not be aware of, or intend, that you are legally in partnership with those persons. Even arrangements often characterized as a “joint venture” or “strategic alliance” can, in certain circumstances, be subsequently determined to be a general partnership with all of the attendant rights and obligations of actual partners.
British Columbia law provides certain guidance in terms of determining whether or not people are in partnership. If persons are carry on a business as agent for, or on behalf of, one another, they will generally be partners and if a person receives a share of the profits of the business, he or she will generally be treated as a partner in the business (in the absence of evidence to the contrary).
Why is this important?
You, and your business partners, are the partnership business (similar to if acting alone in a sole proprietorship (see here), the proprietor itself is the business. In a partnership your financial resources are combined with those of your business partner(s) and put into the business. You and your partner(s) would then share in the profits, if any.
However, it must be understood that in a general partnership each partner is personally liable for all debts and obligations of the business incurred while he or she is a partner. A partner may also be personally liable for the wrongful acts of his or her fellow partners and partnership employees if any wrongful act is committed in connection with the partnership business (as stated above, the implications of a "limited liability partnership" or "LLP" are not discussed here). Furthermore, partners owe each other certain fiduciary duties (one of the highest standards of conduct at law, similar to directors to their corporation or lawyers to their clients). Unless otherwise provided for in a formal agreement, a partner cannot obtain a private advantage at the expense of the partnership. Partners are bound, in dealing with the partnership’s business, to act in the best interests of the partnership itself and share any benefits with the other partners. Partners are also expected, and can be compelled, to render true accounts and full information of all things affecting a partnership.
The legal rights and responsibilities that often follow from the determination that a group of people are pursuing a business as a partnership can often be unintended, or at least unanticipated. That is why good legal consultation and advice is prudent when starting any business.
Of course, one perceived advantage of a partnership (tax issues aside) is that they are fairly easy and inexpensive to form and require, subject to the exceptions below, little or no formal action to establish. However, if two or more people are becoming partners for trading, manufacturing, or mining purposes, they are required under the Partnership Act (British Columbia) to register a business name and file a brief description of their partnership.
Also, while the general partnership structure may be seen as the “do nothing” option in terms of business structure for two or more persons undertaking a business, it should be emphasized that it is not a business structure that necessarily allows you to do nothing. Regardless of how you decide to pursue your business, other formalities may apply and you must turn your mind to additional business requirements like municipal business licencing , WorkSafeBC registration, Goods & Services Tax (GST) and Provincial Sales Tax (PST) registration.
Although it is not required that a general partnership have a written partnership agreement, it is almost always a good idea to have one. Unlike a sole proprietorship, but similar to some extent to corporations, British Columbia has legislation which imposes a system of rights and duties upon partners – much of which can be varied in a formal agreement if appropriate. For example, under the Partnership Act (British Columbia) all of the partners are entitled to share equally in the profits of the business but this may not be intent or the arrangement among the partners and can be varied by way of a formal partnership agreement. A partnership agreement can also define management responsibilities, deal with issues like the removal of a partner and ensure the partnership’s continued existence after a partner departs. However, the importance of a partnership agreement often leads to a perceived disadvantage of pursuing a business as a general partnership – (unlike articles of incorporation but similar perhaps to a shareholders' agreement) negotiating and drafting a partnership agreement can be complex and expensive depending upon the demands of the partners involved and the complexity of their business arrangement.
Tax matters can and often are the sole driving determination for pursuing business as a partnership. Each partner is taxed personally on his or her share of partnership income, so a tax return for the general partnership itself is not required. There are limits to what expenses can be deducted and taxable income is subject to individual personal tax rates. In certain circumstances a partnership may provide tax advantages because business losses can be deducted against other personal income. For example, if founders of a proposed business expect there will be losses in the first years of operation of the business, they may want to use a partnership so that they can apply these losses as individuals against other sources of income.
Generally partnerships are appropriate in circumstances where the potential business may be legally unable to incorporate; where there are anticipated significant tax advantages particular to a partnership arrangement; or where a business undertaking is restricted to a single particular project (like a property development, infrastructure program or movie production). In almost all circumstances a general partnership can only be suggested as a potential suitable business structure when there are a relatively small number of partners who can place substantial degree of trust and confidence in one another.
Endeavor Law can assist new entrepreneurs and small business owners consider, implement and maintain the business structure that is right for their particular circumstances including the preparation of formal partnership agreements. Endeavor Law will always seek to provide competitive pricing for any legal services requested and is pleased to discuss fee arrangements that suit any potential client.
Does not constitute legal or other advice and must not be used as a substitute for legal advice from a qualified legal professional in your jurisdiction who has been fully informed of your specific circumstances. Information may not be up-dated subsequent to its initial publication and may therefore be out of date at the time it is read or viewed. Always consult a qualified legal professional in your jurisdiction.
[1] SMALL BUSINESS PROFILE 2018 published by the B.C. Ministry of Jobs, Trade & Technology (see here).