Business Partnership Agreements: What You Need to Know

What Are Partnerships?

Partnerships are arrangements between two or more persons carrying on business together with a view to profit (Partnership Act, s. 2). In BC, we have three types: general, limited, and limited liability. Limited partnerships form between a partner and a corporate entity. Limited liability partnerships safeguard partners from personal liability.

General partnerships may automatically form, even absent a written agreement, when the parties’ words and conduct suggest a partnership arrangement. The issue, however, is liability. In general partnerships, partners are personally liable for the businesses’ losses and even their partner’s wrongful conduct where it is related to the partnership.

Consequently, general partnerships are commonly reserved for few partners who hold great trust and confidence in one another. 

Cue Partnership Agreements

Partnership agreements can come to your rescue. These contracts allow you and your partners to determine the terms that govern your business arrangement.

The Partnership Act imposes default rights and obligations on partners unless you and your partners create a partnership agreement with terms to the contrary. For example, if you want partners to hold different managerial responsibilities or have partners receive an unequal division of profits, you should include terms in your partnership agreement to that effect.

If you and your partners have a unique set of needs based on their business, then you should tailor your partnership agreement accordingly. In doing so, you may want to consider the following key issues to best protect your interest in the business: the term of the partnership, initial capital contributions, what happens if a partner dies, limits on the ability to enter transactions on behalf of the partnership, ability to expel partners from the partnership, restrictions on the transfer of partnership interest, and any dispute resolution process.

Benefits 

Partnership agreements have many advantages. Being simple and inexpensive, partnerships allow for the quick start-up of your partnership. Moreover, partnerships can provide tax savings. Where business losses are anticipated at the get-go, owners can deduct such losses from their personal income.

Disadvantages

The major downside in a general partnership is unlimited liability. Partners maintain personal liability for business debts and liabilities, and partners are jointly and severally liable to third parties.

While you can create a partnership agreement to divide the responsibility for debts among the partners, you may benefit more from incorporating. Second, your interest in the capital of the partnership forms part of your personal assets which renders it vulnerable to any personal liabilities outside of the partnership.

Third, as a partner and not an employee, you are not entitled to many of the benefits afforded in an employment relationship.

Take-away 

When deciding whether to form a partnership or to incorporate, you should seek independent legal advice. If you choose to form a partnership, create a partnership agreement and ensure you are fully informed of your rights and obligations in relation to the other partners.

Feel free to book a free consultation with us so that we can help you make the best decision for you and your business.