i. Creation and Registration
The second form of carrying on business is a partnership, which is governed by the provisions of Alberta’s Partnership Act. A partnership is defined as one or more persons carrying on business with the intent of profit. The partners can be either individuals or corporations, such that it is possible for one or more individuals or corporations, or a combination of individuals and corporations to carry on business as a partnership.
A partnership is created simply by the partners commencing business, whether or not any formal agreements have been signed.
Like a sole proprietorship, there are no particular registration requirements in order to create a partnership. If there is no partnership agreement, then the Partnership Act provides the rules governing the relationship of the various partners between themselves.
ii. Rights Between Partners
As between partners, in the absence of agreement, each partner:
- is equally entitled to participate in the business;
- is equally entitled to a share in the profits of the business;
- is equally liable for any liabilities or losses of the business;
- is equally entitled to examine the books, records and financial statements relating to the business; and
- must devote their full time and energy to the business.
In the absence of any agreement to the contrary, each partner would be expected to devote his full time and attention to the business of the partnership, which would prevent the carrying on of a side business, or as a “part-time” partner.
It is both customary, and advisable, for partners to have a partnership agreement to set out how the partnership is to be structured and its affairs conducted.
If it is intended that one partner may have a disproportionate share of the profits or a disproportionate share of management responsibilities, it is important that a partnership agreement is drafted and signed before the partnership commences business. The partnership agreement will provide for the manner in which the profits, or losses, are to be shared, and who, amongst the partners, will manage the partnership.
The partnership agreement typically deals with:
- who will be in charge of the day to day management of the partnership;
- who is entitled to financial statements and accounting records;
- the allocation of profits, or losses, amongst the partners;
- provisions such as retirement from the partnership, or the forced expulsion from the partnership; and
- who owns the assets on the windup of the partnership.
iii. Power to Bind
In a partnership, each of the partners has the ability and the power to bind all of the partners to any particular business arrangements that they choose to make.
iv. Liabilities of Partners between Themselves and to Others
The partnership agreement may delegate authority among the various partners to do various tasks. It is typical that the power to run the partnership is actually delegated to the management committee of partners.
Because a partnership is not a separate legal entity, liabilities of the partnership are shared by all of the partners, in their personal capacities. Partners are liable for all of the obligations and debts of the partnership, both individually and as part of the partnership.
The partnership itself does not pay taxes on its income. A partnership is not, in law, considered to be a separate legal entity and, accordingly, the partnership does not file a tax return.
The result is that, when a partnership determines its net profit at the end of its fiscal year, the net profit is allocated to the individual partners in whatever ratio is determined under the partnership agreement. The individual partners then include that income in their respective tax returns.
vi. Name of the Partnership
The Partnership Act provides that if any person or persons are carrying on business in a name other than their own, then they must file a notice of that name, called a Trade Name Declaration, at the Alberta Corporate Registry.
The declaration does not confer any rights to the name, but is simply evidence of the usage of the name and the parties who are using it.
CAMERON HORNE LAW OFFICE has extensive experience advising small business owners and partnerships with respect to the partnership structure, liabilities and drafting partnership agreements. We would be pleased to discuss your particular needs with you, in a professional and relaxed environment. Please call Cameron Horne Law Office for a quotation for our services and to arrange an appointment to discuss your needs.