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If You are a Partner In a Business, Have You Signed a Partnership Agreement ?

by: Peter Cusimano, B.Sc., LL.B.

Who Should Read This

This article is intended for anyone who is a partner carrying on business under a partnership. A “partnership” exists when two or more persons (individuals or corporations) carry on business in common with a view to a profit. The Partnership Act contains provisions that governs the legal relationship of the partners to each other. These provisions can be varied by a partnership agreement signed by all the partners. This article discusses how a written partnership agreement can work for your particular business and potentially save you money, aggravation, disappointment, and failure of the partnership.

Why You are at Risk

Although most new partners believe that they were meant for each other and they’ll always get along, situations will almost always arise that the partners never contemplated. If there is no written partnership agreement with the other partners but instead your partners maintain only an oral partnership or in other words a partnership based only on a handshake then the Partnership Act will govern the relationship which may not be in accordance with the original intentions of the parties. For example, if there is no written partnership agreement outlining the circumstances whereby the partnership will come to an end, the Partnership Act provides that the partnership will automatically end upon the occurrence of any of the following events:

  • on the expiration of the term fixed for its existence;
  • at the completion/termination of the single adventure or undertaking for which it was created;
  • upon any partner giving notice to the other partners of his/her intention to dissolve the partnership;
  • upon the death or insolvency of any partner; or
  • when ordered by a court to do so pursuant to certain circumstances under the Partnership Act.

As such, your partnership may be in jeopardy when disagreements or unexpected events occur which cannot be resolved. In the 1990’s your business requires co-operation of all partners in order to be successful and if you do not adequately protect yourself, your fellow partners may have a different philosophy than you with respect to the conducting of business. Alternatively, unforeseen events may occur that the partners cannot agree on how to resolve. Therefore, unless you have a written partnership agreement in place that deals with these concerns it may be very difficult and very expensive to resolve any disagreements or deal with an unexpected termination of the partnership.

How To Protect Yourself and Your Business

If you are conducting business in partnership with others a written agreement among the partners (called a “partnership agreement”) should be used to help protect you and your business. The use of a partnership agreement can save you money, time, aggravation, and most importantly your business. The result is a greater trust and harmony among partners which is fundamental to every successful business.

If there is a dispute or uncertainty on how to proceed in a particular situation, the partners can refer to the partnership agreement for guidance. In the event that the agreement does not cover the circumstance and the situation cannot be resolved by the partners, an arbitration clause can be inserted in the agreement that requires the dispute to be referred to an independent third party.

Although some partners believe that asking fellow partners to sign a written partnership agreement will spoil the relationship, smart business people know that a good partnership agreement helps to protect their business and all parties will feel more comfortable knowing that their respective duties, obligations and benefits are in writing. The agreement will be tailored to the specific requirements of your business and will be written in plain English.

What Your Partnership Agreement Should Include

Your partnership agreement should describe the duties and responsibilities of the partners, methods of making decisions, and dissolution of the partnership. In addition your partnership agreement will include the following provisions:

  • Date of agreement
  • The names of the partners and any other parties
  • Definitions to clarify terms for easy understanding
  • Partnership name
  • Term of the partnership
  • Place of business
  • Description of the business
  • Capital contributions required by the partners
  • Method for division of profits
  • Management of partnership and decision making procedures
  • Signing authority for documents
  • Banking arrangements and signing authority for cheques
  • Ownership of partnership property
  • Transfer of partnership interest
  • Procedures for retirement, bankruptcy, incapacity, or death of a partner
  • Non-competition
  • Confidentiality
  • Non-solicitation
  • Procedure for admission of new partners
  • Insurance
  • Accounting and records of partnership
  • Auditor or accountant of partnership
  • Dissolution and distribution of assets
  • Arbitration and dispute resolution
  • General contract provisions
  • Relevant schedules (if any)

How the Law Office of Peter Cusimano Can Help You and Your Business

I will meet with you and evaluate the needs of your business. I will prepare the necessary partnership agreement and will ensure that the agreement contains whatever is required to address any specific needs of your business and the partners. You will find that my agreements are complete, and understandable. Complete and clearer agreements are harder rather than easier to do. If something is not clear to you, I will explain it to you.

Peter Cusimano practices business law in Toronto, Ontario.