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