Partnership disputes – Advice from a Business Lawyer

What is a Partnership?

A partnership in Canada is a relationship (or association) between two or more legal entities joining together to perform for-profit activities. Legal entities doing business together can be individuals, corporations, trusts, or partnerships. That means two or more associations (partnerships) can come together, establishing a third entity – also a partnership.

Each partner contributes money, property, labor, or skills. In return, they get a share of the profits of the business. On the other hand, partners bear the losses together, too. The division of gains and losses is a matter of partnership agreement partners sign when establishing the partnership. In Canada, individuals or corporations can form an association through a verbal agreement. However, a written partnership agreement is recommendable. It sets out the operational rules, entering or leaving requirements, division of profits and losses, etc.

To register a partnership in New Brunswick, partners must file a Certificate of Partnership (according to the Partnership and Business Names Registration Act). In addition, partners establishing a limited liability partnership must file a Certificate of Designation of Limited Liability Partnership.

Unlike corporations, partnerships are not separate legal entities. Each partner remains personally liable for the debts and obligations resulting from the business operations (with exceptions in limited liability partnerships).

Types of Partnerships in Canada

Businesses in Canada can choose from three types of partnerships:

• General Partnerships. It is a type of partnership in which partners join resources to do business together, sharing the profits and losses. Each partner in a general partnership bears total personal liability for all partnership’s obligations, debts, and torts.

• Limited Partnerships. Limited partnerships have different structures compared to general partnerships. One or more partners have unlimited liability (general partners), while one or more partners have limited liability. That means that general partners manage the business without limitation. On the other hand, limited partners (also known as silent partners) have a restricted (advisory) role in managing the business.

• Limited Liability Partnership (LLP). As the third form of partnership, a limited liability partnership gives more liability protection to partners, making it similar to corporations. However, LLP is not a separate legal entity. In Canada, only high-risk professionals can form LLPs (lawyers, doctors, architects, accountants).

Advantages of Partnerships

Partnerships offer numerous advantages sole proprietorships and corporations lack. Partnerships are not subject to public reporting rules, except for financial information partners must provide to banks. The decision-making process is simple. Important decisions require voting, while minor decisions do not – any partner can decide individually if others are informed. The administration expenses are moderate. Accounting is internal, meaning partners track revenues and cash flow themselves (with support from outside professional accountants). Finally, since the partnership is not a separate legal entity, each partner pays taxes personally for their share of income.

What About the Downsides?

Partnerships have disadvantages, too. Unlike corporations, there is no liability shield in associations. Each partner is liable with their assets for the business’s debts and obligations. Furthermore, partners cannot claim tax deductions – their profit share is subject to personal tax rates like any other income.

Why Do Partnership Disputes Arise?

As mentioned, a partnership is a relationship between two or more individuals, corporations, or trusts. As with any other relationship, it has its ups and downs. Depending on market conditions, business trends, and interpersonal relationships, partnerships experience periods of prosperity and crisis. There are various reasons why partnership disputes can occur, but the most common divide into four categories:

• Management Issues. Partnership agreements define the role of each partner, setting out their responsibilities in managing the business. Disputes often arise when one of the partners overreaches their power (for example, by making an important decision on their own or deciding on other issues without informing other partners).

• Share of Profit and Loss. The way partners share profits and participate in losses is typically regulated under a partnership agreement. The agreement can define each partner’s share of profit proportionate to their contribution or in another way (if all partners agree). Likewise, bearing the burden of losses can also be defined regardless of the money and labor each partner invests. Any departure from the partnership agreement regarding profits and losses gives rise to a dispute.

• Liability. Liability is an area where partnerships differ from corporations. Partners are personally responsible for debts and obligations resulting from business operations. However, some forms of partnerships provide a higher degree of liability protection. Limited liability partnerships give partners protection similar to shareholders. Disputes can arise when partners disagree over liability resulting from a specific contract or project. Disagreement can occur regardless of the type of partnership (general or limited liability partnership).

• Expulsion. Among other operational issues, partnership agreements deal with breaches of rules and the ensuing consequences. Most provide removal as a sanction for a partner that does not comply with agreed-upon rules. Depending on how the partnership agreements deal with the expulsion (whether they allow it or not), disagreements between partners can arise, leading to a dispute.

Resolving Partnership Disputes in Litigation

When internal dispute resolution mechanisms fail, partners traditionally turn to litigation.

Resolving partnership disputes in court is a time-consuming and cumbersome task. The court process is public, meaning business partners will inevitably experience undue publicity hurting their reputation. Going through discovery, opening statements, witness examination, expert witness testimonies, and other aspects of the court process can be daunting. As a vindictive process, litigation involves confrontation with your partners. You will find yourself in a situation where you will have to answer tough questions, no matter how detrimental that may be to a personal relationship with your partner.

In sum, litigation is a challenging experience, particularly if you represent yourself in court (or hire a mediocre lawyer). Fortunately, it does not have to be like that. With the help of an experienced, well-versed attorney, you can prove your claims without much effort, achieving the desired outcome.

Turn to an Elite Business Lawyer for Help

Jack Haller is a top-notch business lawyer practicing in New Brunswick, Moncton.

His business-related expertise, including in-depth partnership knowledge, is unmatched by the competition. 

There is no complex partnership dispute for Jack. For him, each case is an opportunity to prove his excellence.

Reach out today to schedule your free consultation. 506-204-1203 or jack@hallerlaw.ca