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The End of A General Partnership

Introduction

Business partners tend to come and go. It is important to know your rights when it is time to part ways with your business partner.

 

When does a partnership end?

If you and your business partner have a written partnership agreement, the partnership will end when the agreement has expired or you have taken the steps outlined in your agreement to end the partnership. If you do not have a written agreement,  the Partnership Act (Ontario) states that the partnership is ended when you agreed it would end; or when one partner gives notice to the other(s) that it is ended; or if the partnership is for a single business purpose, when that business purpose has ended.

 

What happens to the assets when the partnership ends?

Generally speaking, the debts of the partnership will be paid,  first to creditors and then to partners, and unless the partners have agreed otherwise, after returning the capital invested by the partners the remaining assets will be split among the partners according to their ability to share in the profits of the partnership. If there are more debts than assets, the debts will be shared among the partners in the same way as profits would be shared.

 

What happens if a partner has given notice to end the partnership but the other partner carries on?

This happened to two partners who purchased a taxi plate together. Their written agreement stated that the partnership would end after 5 years. One partner gave notice that he was not going to renew. The other partner did not want to end the business, and they both carried on. The ‘exiting’ partner tried repeatedly to end the partnership, and after 3 years, stopped using the taxi plate.

The other partner continued to use the taxi plate owned by the partnership for his own benefit. The ‘exiting’ partner sued. The court ordered the reluctant partner to share 50% of the profits made during the time he had sole use of the taxi plate, and ordered the plate sold and the proceeds equally divided between the two former partners.

 

If one partner won’t give up the partnership assets after the partnership has ended, they will have to share the profits made using the partnership property , and the property will still have to be divided among the partners.

 

Takeaways:

  • a written partnership agreement should provide for a clear termination procedure or a fixed end date
  • including clear buyout provisions in the agreement can make the exit of a partner much easier and cost effective
  • former partners who continue to use partnership property after the end of the partnership will be required to share the profits made from using the partnership property

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Limited Liability Partnership: What is an LLP?

Introduction

Are you starting a business related to law, accounting or medicine? These high risk fields often operate as a “Limited Liability Partnership” (LLP). This structure allows partners to limit some of their risk for the actions of  their partners in the business.

What is a Partnership?

‘Partnership’ is the relation that subsists between persons carrying on a business in common with a view to profit. A partnership is not a separate entity like a corporation. This means that if the organization incurs a debt or liability, the partners will be jointly and severally liable. Being jointly and severally liable means that a claimant can sue just one or some of the partners,and each partner alone or together would be fully responsible to pay. It would then be up to the partners to figure out among themselves how to share responsibility for the claim. It is possible that the partners may split the liability evenly but a situation could also occur where the one partner has to take it all upon himself.

 

How does a Limited Liability Partnership Differ?

A limited liability partnership is formed of at least one general partner and limited partner. The general partner(s) will be jointly and severally liable for the partnership as any partner would be in a general partnership. On the other hand, the advantage of becoming a limited partner is the range of protections that provincial legislation offers. Broadly speaking, a limited partner is protected from liabilities affecting the partnership arising from other partners in the partnership, due to no fault of their own.

There are two classified types of protection that vary among provinces: a partial shield and a full shield.

 

Partial Shield

A partial shield protects the limited partner from liability of the partnership arising from other employees of the partnership in the provision of professional services. The specific acts that are covered by a partial shield are negligence, wrongful acts or omissions, malpractice or misconduct. However, this does not protect the limited partner from contractual claims against the partnership. Moreover, supervisors for employees may be held liable for inadequate control over their subordinates if they cause the firm to suffer a liability.

Provinces that provide a partial shield protection to limited partners in LLPs include Ontario, Alberta, Québec, Manitoba and Nova Scotia. It is important to note Ontario has a narrower range of protection than the other provinces.

 

Full Shield

A full shield protects the limited partner from all claims against the partnership. They are not liable to the partnership by virtue of a being a partner but still liable if liability arises from their own mistake.

Provinces that provide a full shield protection to limited partners in LLPs are the following: BC, New Brunswick and Saskatchewan.

Currently, only P.E.I.

is the only province that does not allow LLPs.

 

Limited Liability Partnership in Ontario

The partial shield protection in Ontario is narrower than the typical partial shield protection. In Ontario, limited partners are protected from claims of negligent acts or omissions against their firm that they did not commit. If we contrast this protection with those granted by other provinces, Ontario does not protect the limited partner from claims of malpractice, misconduct or any acts going beyond negligence. Moreover, the same restrictions apply whereby any supervisor may be held liable for inadequate control over their employees.

 

Conclusion

Limited liability partnerships provide mitigation and security for those who work in high risk professions. Although provinces in Canada vary on how much Limited Liability Partnership protect their limited partners, the fact remains that a degree of protection is available. It also means that those in Limited Liability Partnership should be aware of the limitations on the protection that their province provides.

 

 

Takeaways:

  • a partnership is a relationship among partners, not a separate entity
  • the level of protection for a partner in an Limited Liability Partnership depends on jurisdiction
  • seek professional advice on the best structure for your partnership or business, and for advice on how Limited Liability Partnership’s are regulated in your province

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Mergers, Partnerships and Joint Ventures – Basic Terms

I am often queried about what terms should be considered by companies that are considering entering into a merger, partnership or joint venture (which I will describe in this article as “Joint Venture”).  Here are a few items that are highest on my list.

1.     Come to basic terms on the revenue/cost arrangements

If the parties can try out a relationship for mutual benefit with a fee-sharing or royalty arrangement, such a trial would be valuable.  Not all costs can be determined up front on an experimental arrangement, however, each party should be frank about its desired financial outcomes so there is no confusion down the road.

 If all costs cannot be determined up front, perhaps a trial or “pilot” project would be helpful in fleshing those out.

2.       Date Before You Get Married:

There are a lot of things that could go wrong in a partnership – lack of seriousness, poor cultural fit, lack of diligence, poor quality teams, inability to deliver one’s end of the bargain, and so on.

Consider if there is a way to try out the relationship without “opening the kimono”.  Information should be freely shared if it will assist in the success of the joint venture, but the parties should be careful not to give away company trade secrets until such time as the joint venture is a proven success.

Rather than preparing detailed merger agreements, the parties could put in place an agreement on the basis of “guiding principles”, which is broad and high-level in nature (while still containing certain binding terms, including “confidentiality”, “non-circumvent” and “non-solicit” (among others), to protect a party’s leads, opportunities and key employees, should the joint-venturers decide to part ways).

 A preliminary agreement of this nature can assist the parties to get to the “get to know each other” stage.

3.     Transparency on costs and revenues

This point is intuitive – all parties should receive frequent and periodic financial reports to understand whether the arrangement is sensible.

4.     Preservation of the original brand

In terms of shared branding, the parties can consider acting jointly under a different “brand name” to preserve the brand value of the original entities, or at the very least, moving forward in a way that does not dilute or “park” any of the existing brands.  Many brands will operate under a “sub-brand” to price-discriminate or for expansion reasons, this thinking can be adopted by potential joint-venturers.

These items, the desire to negotiate in good faith, luck and timing will aid in the success of a Joint Venture.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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