Many entrepreneurs begin their business with family members or friends who share a particular interest or skill set. In doing so, they often focus all of their attention growing their venture and forget the importance of reducing their agreement to writing. Many entrepreneurs may be surprised to find out that if you do not describe what you and your company’s co-founders are doing together, the law may automatically determines that you are in a partnership. Being a member of a partnership results in liabilities and benefits that every partner should be aware of. Understanding how a partnership works and when it exists can help to avoid disputes that may result in business or civil litigation.
The first question is to determine if you are in fact part of a partnership. A partnership is an implicit contract that will exist between two or more people that carry on business with each other with the intention of earning a profit. Whether or not a partnership exists ultimately depends on whether the individuals intended for a partnership to exist. Generally, a paper trail show distributions of profits among the members can indicate that there is a partnership. A partnership cannot exist if a corporation was created to carry on the business instead of the individuals themselves.
Business owners should be aware that if they have a partner, that partner can bind the business (legally known as the “firm”) to contracts or other commitments. If such a commitment requires the other partners to complete tasks or make certain payments, the other partners are obligated to do so. All partners are liable for the obligations of the entire firm.
Partners are also required to share all profits earned by the partnership equally among them. If the partnership is dissolved, any remaining partnership property must be divided equally. There are some important caveats to the distribution of profits and surplus upon winding up a partnership that are beyond the scope of this blog. If you require further details on partnership dissolutions, please contact our law firm as we are business dispute lawyers.
Partnerships are ultimately contracts. It is easier and more cost effective to agree in writing on the roles, responsibilities and division of profits, than to argue about it later in Court. Plus, if certain aspects of the partnership area agreed to in writing, the default law in Ontario which is called the Partnership Act, may not apply to those aspects. It is prudent to put your business arrangement in writing as a contract agreed to by the business founders will almost always provide a better reflection of what the parties intended. A written contract also makes it much clearer to determine when the agreement was breached and what the consequences should be.
If you believe you are involved in a partnership or business dispute, please contact our firm which is comprised of business and contract dispute lawyers.