Ontario Partnership Agreement Lawyer: Understanding Partnerships

Please keep in mind that this is not legal advice. The information provided herein is for educational purposes only. If you would like to get in touch with a lawyer to help you draft, interpret, negotiate or resolve a dispute about an Ontario partnership agreement, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers). We have Ontario lawyers who can assist you in this regard (I would know, I’m one of them!). If you want to get in touch with me directly, feel free to email me directly to discuss all your partnership agreement needs!

In the next series of blogs, I’ll be discussing partnership agreements.  But before we get into the meat and potatoes (i.e. a partnership agreement sample or form) of what goes into a typical agreement, I thought it would be worthwhile to start off by discussing the basics.  What is a partnership and how is it formed?  Do you need to have a written agreement?

What governs partnerships?
Ontario partnerships are governed by the Ontario Partnerships Act, as well as by the agreement that exists between the partners, and rules of common law and equity (i.e. judge-made rules concerning partnerships).

What is a partnership?
A partnership is a business relationship.  It exists when two or more people carry on business with a view to make profit.  This has been codified in the Ontario Partnerships Act.  If profit is not the name of the game (e.g. it’s for cultural, political, religious, social purposes instead), then it isn’t a partnership.  Since the partners are doing the business in common, they have taken on mutual rights and obligations.  They are carrying on business for common benefit.  If the so-called partners are carrying on their businesses truly independently, then there can be no partnership between them.

Formed by Design or Inadvertently
Now a partnership can be formed on purpose or by mistake or unknowingly.  It doesn’t matter.  So long as the criteria for a partnership exist, the parties will be considered partners and they will be governed by the Act, their agreement, and common law and equity rules.  So is it obvious when a partnership is formed?  Nope.  Plain and simple: courts have used a number of factors / criteria to determine whether a partnership exists.  No one factor is determinative.  Courts will look at all of the circumstances to determine if a partnership exists.  These criteria include:

• Sharing profits.
• Sharing responsibility for losses, including guaranteeing partnership debts.
• Jointly owning property.
• Controlling the partnership business.
• Participating in management.
• Stating an intention to form partnership in a contract.
• Making government filings showing partnership (e.g., registration under business names legislation, tax returns).
• Having access to information regarding the business.
• Having signing authority for contracts, bank accounts.
• Holding oneself out as a partner.
• Contributing money, services, or property as capital (especially if contribution is complementary to the contribution of others for the purpose of running a business).
• Full-time involvement in the business.
• Use of a firm name, perhaps in advertising.
• Firm having its own personnel and address.

Does a partnership need a written agreement?
It’s often the case that parties are in a partnership relationship without knowing it or having drafted up any agreement.  Do they need one?  Nope.  An oral agreement or understanding to operate their business as a partnership is sufficient.  The big problem is that their agreement is subject to change, to be incomplete, to be unclear, etc.  That’s why a written agreement is BEST.  Also, even though partnerships are governed by the Act – which contains default rules concerning partners – the Act is not comprehensive.  It does not provide detailed rules.  Plus, the partners themselves may want to write their own rules instead of relying upon the standard rules in the Act.  The partners may want to control for example, when a new partner may be admitted, how to terminate the partnership, how disputes are to be resolved, the partners’ respective rights and obligations, etc.  That’s why a partnership agreement in WRITING IS ESSENTIAL!

Remember: you can contact me directly if you need a partnership agreement!

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Please keep in mind that this is not legal advice.  The information provided herein is for educational purposes only. If you would like to get in touch with a lawyer to help you draft, interpret, negotiate or resolve a dispute about a joint venture, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers).  We have Toronto and Ottawa lawyers who can assist you in this regard (I would know, I’m one of them!).

So this blog will deal with the basics of a joint venture agreement or contract.  In other blogs, I’ll get down to the nitty gritty.

Definition
Plaint and simple, a joint venture is a contract between two or more parties to share resources, knowledge, skills, etc. towards a common objective.

Parties
As usual in these types of agreements, the parties are identified at the get-go (make sure this is done properly or else your contract won’t be worth the paper it’s written on!).

Recitals
This is the background story you want to tell that leads up to the formation of the joint venture.  It could go something like: Party X does Y and has Z.  Party A does B and has C.  The two would now like to join forces to make even more $$$.  So they’re agreeing to have a joint venture in accordance with the terms and conditions set out in the joint venture agreement or contract…

Definitions
It’s a good idea to set out the definitions you’re going to be relying upon near the top of the joint venture agreement (for ease of reference and good organization).  You could include definitions here about “Confidential Information” (assuming there will be confidential information passed between the parties as a result of the joint venture), what constitutes “Force Majeure” (e.g. act of God that relieves a party of liability under the agreement in certain circumstances), etc.

Business Structure
The joint venture agreement or contract will generally state how the joint venture is structured.  Is it simply two separate entities acting in concert through the joint venture agreement or contract?  Will there be a new corporation formed?  Will there be a partnership formed?  Will that partnership be a general or limited liability partnership?  For more discussion about the general forms of business one can structure in Ontario, check out this free information about business structures we’ve been accumulating.

Nature of the Relationship
So will the joint venturers be partners (capable of binding each other), corporate shareholders, or simply joint venturers (i.e. their rights and obligations are limited to the terms of the joint venture agreement or contract).

Term and Termination
How long will the joint venture last for and what events give rise to its premature termination?  Will the parties simply be able to give each other notice?  Will the joint venture dissolve by operation of law, by one party filing for bankruptcy, by one party attempting to illegally assign their interest in the joint venture to a third party, etc.?  Again, you should consult with a lawyer to find out what kinds of things typically go in this section.  Also important is what to do in the even of default.  Does one of the joint venturers become liable to pay the other if they are at fault?  Who determines fault and according to what test (e.g. sole and absolute discretion)?  There’s a lot to think about here…

Joint Venture Assets and Benefits
How will these things be deal with?  Will there be a percentage of ownership?  Will the benefits be based on revenues or profits?  Can these interests be assigned?

Operations
How will the joint venture be operated on a day-to-day basis?  Will the joint venture committee have the power to enter contracts on behalf of the joint venture?  Perhaps the joint venture committee will create a new corporation to take on a certain responsibilities and simply own equally the shares of the new corporation.  That new corporation would operate as a separate business, but its shareholders would be the joint venturers (who would elect the directors, who in turn would appoint the day-to-day officers).  This would be a good place to put reporting and record-keeping requirements too.

Joint Venture Responsibilities
Here, we get to the nitty gritty of who will be responsible for what in the joint venture. Separate paragraphs will be needed for each of the parties.

Joint Venture Management
Will there be a committee?  Will representatives from each of the parties be on the commitee?  Will there be a chairperson?  How will meetings be managed, votes and decision made?  Will there be direction from owners and delegation to the committee?  In my opinion, and as I’ve previously blogged about, businesses should be run as dictatorships with consultants, not as democracies (too many voices means things won’t get done).  

Representations and Warranties
What kinds of true, fair, and complete statements must the parties make to induce the other parties to enter the agreement?  The parties want to know that their joint venturer partners have the authorization and operational wherewithall to do what it is they are about to do.  If these representations and warranties no longer hold true, then what’s the consequence?  Notice?  Termination?  This should be spelled out here…

Liability and Indemnification
Will the joint venturers try to limit their liability from each other in connection with the joint venture?  Will they indemnify each other for their own wrongdoing – whether in contract, tort, negligence, misconduct, breach of statute or otherwise?

General Terms and Conditions
This section of the Joint Venture Agreement will deal with things like (which I’ve previously touched on in teh context of an independent contractor agreement):

• Notices
• Entire Agreement
• Governing Law
• Interpretation
• Assignment
• Waiver
• Cumulative Remedies
• Counterparts
• Enurement
• Entire Agreement
• Time of Essence
• Independent Legal Advice
• Force Majeure
• Severability
• Survival
• Currency

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Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to creating a limited liability company or amending a corporation’s articles of incorporation, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto and Ottawa business lawyers registered on the website who can answer your questions or help you with your  Ontario or Federal corporations.

As a follow up to my recent post about income-splitting shares, I neglected to mention one of the biggest benefits of using income splitting preference shares: income splitting to reduce reduce household taxes.

Take the following example.  You have a corporation.  It earns $300,000 in taxable income.  Because of the small business credit (which I will be discussing in a future blog post), the corporation only pays 16.5% tax on that amount (this rate is going down to 15.5% starting July 1, 2010).  What do you do with the after-tax dollars?  Well, you could either keep it in the company and let it accumulate or you could dividend it out.  The latter is where the income-splitting shares come into play.  You can simply give these shares to members of your family who have little or no income.  Then, when the corporation’s directors (e.g. you) declares a dividend to the shareholders of this class of shares, they will receive and have to pay tax on those dividends.  They will get the benefit of the dividend tax credit.  But the beautiful thing is that less taxes end up being paid than if someone (e.g. you) had a higher income and received the same dividends (because of how our marginal taxes work).  These shares are not susceptible to the attribution rules found in the Canada Income Tax Act.

Remember, if you need help structuring your corporation to create income-splitting preference shares, you should make a post on Dynamic Lawyers.

written by admin \\ tags: articles of incorporation, business, canada, Canada Income Tax, canadian income tax, canadian income taxation, corporation, declarations, dividend, dividend tax credit, income tax act, incorporation, lawyers, shareholder, shareholders

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to drafting articles of incorporation, corporate by-laws, shareholder agreements, or resolutions involving shares, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto and Ottawa business lawyers registered on the website who can answer your questions and assist you in those regards.

What are shares?  What kinds of characteristics do they have?  How are they valued?  Well, in this blog, I’ll be addressing these issues in the context of a federal corporation governed by the Canada Business Corporations Act.

Lets begin with the basics.

Incorporated businesses are owned by persons (which include individuals, sole proprietorships, partnerships, trusts, joint ventures, not-for profit corporations, and other corporations) through shares.  Each corporation, through its articles of incorporation, can designate different classes of shares (i.e. shares with different characteristics).  At a minimum, section 24(3) the Act requires that a corporation have at least one class of shares.  That class of shares are called voting shares because they allow the holders to vote at any shareholder meetings.  They also allow the shareholders to receive dividends as declared from time to time and in the discretion of the board of directors (recall that the shareholders vote in the board of directors through an election).  Finally, the voting shares give their holders the right to receive the remaining property of the corporation on dissolution.   Remember that creditors (secured and unsecured) are entitled to be repaid before shareholders upon dissolution.

If the articles of incorporation provide for more than one class of share, then things can get interesting.  For example, a corporation can have 3 classes of shares (call them Class A, B, and C), all of which carry different rights with respect to voting (voting vs. non-voting), dividends (variable vs. fixed), and priority upon dissolution.  For example, Class C shares may be non-voting, having a right to regular dividends, and have priority over Class A shares.  This puts the Class A shareholders at risk of not getting anything if the corporation goes into dissolution – particularly if there isn’t enough assets to pay out creditors and priority shareholders.

Whenever shares are issued (i.e. sold/transferred to a shareholder in exchange for money, property, or past services rendered – see s. 25(3)), their value fluctuates depending on (1) the value of the company and (2) the total number of issued and outstanding shares.  With respect to the latter, if the corporation continues issuing more shares to different parties, then the original shareholders’ shares will be diluted in value.  In privately-held companies, valuing the shares is much more difficult.  Sometimes, shareholders value the shares as a multiple of something (e.g. book value) instead of potential earnings discounted to today. The value of the shares is typically pre-determined according to some formula set out in a Shareholders Agreement.  If a Shareholder Agreement doesn’t exist, the parties can seek help through a lawyer, consultant, business valuator, accountant, etc.  At the end of the day, the fair market value of the shares is typically described as the price that two arms length individuals would be willing to buy/sell the shares if they didn’t have to (i.e. if they weren’t forced to).

Finally worth mentioning is that the ability to transfer shares may be restricted in the Articles of Incorporation or a Shareholders Agreement.  Such restrictions are worthy of another blog entry entirely.  Furthermore, private corporations (unlike public ones) are restricted in terms of the number of shares they can have issued and outstanding.  Specifically, private corporations can only have 50 different shareholders or less.

written by admin \\ tags: articles of incorporation, business, business incorporation, business lawyers, canada business corporations act, incorporators, lawyer, lawyers, shareholder, shareholder agreements, shareholder meetings, shareholders, shareholders vote, shareholdings, toronto

There are over 17,000 individuals in Toronto who can call themselves a Toronto attorney.  Each Toronto attorney typically has his or her own specialty.  The day of the general practitioner is not as it once was (and is slowly fading away).  In fact, specialization is a preferred strategy to earn above-average returns in any given industry.  Besides, think of how hard it would be for a lawyer who ‘does it all’ to keep up to date with the changing laws in every given legal area.  It’s way too difficult and that’s where negligence cases may arise.

In any event, I thought I’d spend some time discussing the various types of Toronto attorneys that you can come across on a day-to-day basis.  Here’s the first breakdown of types of Toronto attorneys (please keep in mind that this list of the types of lawyers out there is not exhaustive):

• Toronto Real Estate Attorneys: help you buy and sell residential, investment, farm, cottage, recreational, condominium, and cooperative properties.  They also you get a mortgage financing and refinancing as well.

• Toronto Personal Injury Attorneys: help you litigate, settle, or otherwise resolve claims arising from:
  • accident benefits claims
  • dog bites
  • disability claims
  • medical malpractice
  • motor vehicle accidents
  • negligence actions
  • personal injury claims
  • product liability
  • slip and falls

• Toronto Business Attorneys: help you to incorporate and organize, merge/amalgamate, and dissolve your business.  They can help prepare, review, interpret, revise, negotiate, litigate, and resolve the following business documents:
  • shareholder agreement
  • partnership agreement
  • joint venture agreement
  • franchise agreement
  • commercial leases
  • business acquisitions
  • regulatory compliance
  • constructions contracts
  • employment agreements

• Toronto Wills and Estates Attorneys: they offer services from a basic will and powers of attorney  to more complicated tax-planning structures, such as inter-vivos trusts and estates freezes.  They can also help personal representatives in the administration and distribution of estate assets.  Finally, they can litigate on behalf of beneficiaries or the estate trustee on issues such as mental capacity of the testator, validity of a will, etc.

• Toronto Family Attorneys: they can help you with your marriage breakup by drafting a separation agreement.  They can also help you with issues such as divorce, spousal and child support, child custody, possession of the matrimonial home, and the equalization of net family property.
  

• Toronto Criminal Defense Attorneys: they can help represent you against government bodies that have charged you with criminal or provincial offences (e.g. careless driving), including:
  • DUI (driving under the influence)
  • assault
  • sexual assault
  • fraud
  • theft

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