A General Partnership (GP) is a legal relationship between two or more persons, conducting business with a common goal to profit financially. In Ontario, GPs are governed primarily by the Partnerships Act (PA).
No Separate Legal Personality
A partnership is not considered a separate legal entity. In a general partnership, the liability of each partner is unlimited and each partner is liable to the full extent of the GP’s debts. Liability extends to each partner’s personal assets.
Partnership Agreement: Opting out of the Partnership Act’s (PA) Default Provisions
If partners wish to opt out of default partnership provisions under the PA, they can enter into a partnership agreement to memorialize their specific commercial intentions. However, some rules cannot be altered, including any dealings with third parties.
Agency
A partner is an agent of the firm and all of the other partners for the purposes of the firm’s business. In the absence of an internal restriction to the contrary, a partner has wide powers to contract on behalf of the firm, and the firm and all of its partners will generally be bound by contracts that are made on its behalf by the partner acting within its authority.
Capital
Where there is no partnership agreement, the default rules governing the contribution of partners to capital are that all partners are entitled to share equally in the capital. If the partners want a share in proportion to their capital contributions, they must stipulate that in their partnership agreement.
Subject to any agreement to the contrary, all the partners are entitled to share equally in the profits of the business and must contribute equally towards the losses, whether of capital or income. This default rule applies irrespective of the time that partners devote to the firm’s business or the amount of capital that they contribute. Therefore, the default rule is rarely appropriate, and most partnership agreements carefully set out how profits and losses are to be divided, as well as the process for making changes to the partners’ split.
Property
The PA defines partnership property as all property, rights and interests in property originally brought into the partnership or acquired, whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business. As a default rule, partnership property must be held and applied by the firm exclusively for the purposes of the partnership and in accordance with the partnership agreement. Also, property purchased with partnership money is presumed to have been bought on the firm account.
Management
Every partner has the right (in the absence of an agreement to the contrary to take part in the management of the partnership business. A partner owes fiduciary duties as a partner of a GP.
General Advantages
- ease of set up
- direct accountability of those involved in the business
- strong principles of equality and consensualism may be attractive in some contexts
- flexibility to deviate from many default rules (i.e. creation of partnership agreement)
- non-taxable
General Disadvantages
- absence of distinct legal entity with perpetual existence
- unlimited liability of partners
- organizationally, it has its limits absent a detailed partnership agreement: equality principle hampers hierarchy