Sole Proprietorships and Partnerships Explained

Business 4000 Chapter 26
Sole Proprietorships and Partnerships
Sole Proprietorships An unincorporated business owned by a single individual individual No formalities are necessary to create a sole proprietorship Sole proprietorships are subject to the same regulations applying to all forms of business, e.g. business, licences or registration, complying with human rights legislation and health and safety regulations, keeping proper accounts for tax purposes
Business 4000 Chapter 26 Partnerships

The relation that exists between persons carrying on business in common with a view to make a profit Was the most common form of business carried on by two or more persons until corporations legislation became available and popular in the 19th century In 1890, the British Parliament passed the Partnership Act, codifying a Act, virtually complete body of well-settled rules governing partnerships wellAll the common law provinces of Canada have adopted this Act in substantially the same form in their own partnership legislation, e.g. in Newfoundland, the Partnership Act, R.S.N. 1990, c. P-3 Act, P-
The Nature of Partnership The advantage of partnership is that by working together, persons may pool their knowledge and skills and their physical and financial resources The disadvantages are that disagreements may lead to stalemate; dishonesty or incompetence on the part of one partner may lead to losses suffered by the others; and valuable time may be lost in arranging to meet and make important decisions

Partnership is a consensual relationship but persons may be found to be partners even though no written agreement exists and sometimes even where they have not consciously so agreed When determining whether or not a partnership exists, the courts will look to the substance of the arrangement and will not necessarily be guided by what the parties themselves call it Look to definition of partnership in s. 2(c) [All references to the Newfoundland Partnership Act] Act]
The Business Nature of Partnerships Partners must be carrying on a business Associations such as charitable enterprises, joint estate trustees and public boards will not constitute partnerships Isolated or intermittent transactions may not be sufficient to qualify as carrying on business
The Profit Motive The sharing of profits is an essential element of partnership Generally, the sharing of gross receipts does not create a partnership Section 3 specifically says that certain relationships or arrangements will not, of themselves, mean that a partnership exists:

Joint interests in property Sharing of gross returns Even the sharing of profits may not point to partnership where it is part of an arrangement to: Repay a debt owed Pay an employee or agent as part of his remuneration Pay an annuity to dependant of a deceased partner Repay a loan where the lender is to receive a rate of interest varying with the profits Pay the seller of a business an amount for goodwill varying with the profits

Profit sharing coinciding with the ratio of capital contribution is considered to be strong evidence of partnership, as is a receipt of profits by a person who has taken part in the management of the business
Does a Partnership Have a Separate Personality? A partnership merely represents the collective rights and duties of all the partners and does not, strictly speaking, have an existence independent from the partners In practice, there is a semi-separate existence of semithe partnership, as in accounting matters where it is treated as a separate entity with its own assets, liabilities and financial statements

The Partnership Act recognizes: The concept of a firm as what the partners are referred to collectively (s. 5) Partners may agree the firm will continue between surviving or remaining partners in the event one of them should die or become insolvent (s. 33) A partnership may have property that is distinct from the property of the individual partners (s. 21)

For the purposes of court action, a partnership may be treated as a separate entity and sued in the name of the firm rather than naming all the partners as plaintiffs Would be wise to sue the partnership in the firm name to ensure the joint liability of all persons who were partners at the relevant time
The Creation of a Partnership A partnership comes into existence by the agreement, express or implied, of the partnership An agreement in writing would only be required under the Statute of Frauds where it extends beyond one year and performance has not begun In the absence of provisions set out in a partnership agreement, the Partnership Act sets out a number of implied terms that will govern the partnership relationship

It is recommended that partners enter into an effective partnership agreement where they do not wish the legislated provisions to apply, and in order to set out as clearly as possible terms dealing with: The objects of the partnership; The responsibilities, capital contributions and share of profit/losses of each partner; The time and energy each is to devote to the business; The procedures for settling disputes; and, The provisions for dissolution.

Unless varied by the partnership agreement or later by unanimous consent, the Partnership Act sets out the following terms, among others: Property and rights and interests in property brought into the partnership or subsequently acquired by it constitutes partnership property and are to be held and applied exclusively for the purposes of the partnership (s. 21). Property bought with firm money is deemed to have been bought by the firm (s. 22). Partners must share equally in the capital and profits and must contribute equally to losses (s. 24 (a)).

The firm must indemnify a partner for expenses or liabilities incurred by her in conducting the business of the firm (s. 24 (b)). A partner is not entitled to receive interest on his capital contribution to the firm but is entitled to interest at the rate of 6% on amounts in addition to his required contribution (s. 24 (d) and (c)). A partner is not an employee and is not entitled to remuneration (s. 24 (f)). Every partner may take part in the management of the partnership business (s. 24 e)).

A difference arising as to ordinary matters may be settled by a majority of the partners but unanimity is required for a change in the nature of the partnership business (s. 24 (h)). All partners may have access to and copy the partnership books (s. 24 (i)). The introduction of a new partner requires the unanimous consent of the existing partners (s. 24 (g)).

There are certain other provisions of the Partnership Act which are not said to be subject to a contrary agreement, thereby suggesting that partners may not contract out of the duties they impose: Partners are bound to make true accounts and full information of things affecting the partnership to a partner or his or her legal representative (s. 28). Partners must account to the firm for any benefit derived without the consent of the other partners from a partnership transaction or from the use of partnership property (s. 29 (1)).

A partner must not compete with the firm without the consent of the other partners and must account for and turn over the profits earned in such business to the firm (s. 30).
The Liability of a Partner The significance of deciding that a particular business venture is a partnership lies primarily in the partners personal liability to outsiders dealing with the partnership. Acts done by a partner within the scope of his apparent authority bind the firm and all his partners (s. 6). This represents a codified application of the principle of apparent authority in agency relationships, as discussed in Chapter 19. Each partner, together with the other partners, is personally liable for the full amount of the firms debts (s. 10) and for the negligence and other torts of its members (s. 13).

Personal liability only applies to firm obligations incurred while he or she is a partner (ss. 10 and 13), although if a person holds himself out as a partner or allows himself to be represented in such a manner, then that person will be liable to someone who has extended the firm credit on the strength of such representation (s. 15). To ensure that one is not held out to be a partner after leaving the firm, a retiring partner should publish notice of the departure in the Newfoundland Gazette and give actual notice to firm customers/clients. (s. 36)
Termination of Partnership A partnership may be terminated in accordance with the provisions of the partnership agreement or, in the absence of such provisions, in the manner set out in the Partnership Act: Act: By giving notice to all the other partners (s. 26 (1)) Upon the death or insolvency of any partner (s. 33 (1)).

In section 35 the Act also sets out a mechanism to seek dissolution by court order where: A partner is found to be mentally incompetent; A partner becomes permanently incapacitated; A partner is guilty of conduct likely to prejudicially affect the business; A partner breaches the agreement or it is otherwise not reasonably practicable for the others to carry on business with him; The business can only be carried on at a loss; or, It is otherwise just and equitable to dissolve the partnership.
Joint Ventures A joint venture is a business venture undertaken by two or more parties by contributing a part of their respective resources to a specific project. A contractual joint venture is one effected by agreement, without the creation of a separate legal entity. An equity joint venture is a corporation formed, and jointly owned, by the joint venture partners, the purpose of which is to carry on the venture. Co-venturers are in a fiduciary relationship with each Coother, much like partners. In fact, the joint venture may constitute a partnership depending on its substance.
Limited Partnerships A limited partnership is one in which some of the partners limit their liability to the amount of their capital contributions. There must, however, be one or more general partners whose liability is unlimited. Limited partners are prohibited from taking an active part in the management of the partnership under penalty of being considered a general partner, thereby incurring unlimited liability.

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Business 4000 Chapter 26