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, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements. I should know – I’m one of them and you can contact me directly.

I thought I would blog about certain nuances when it comes to limited partnerships formed by extra-provincial persons.  These are often referred to as extra-provincial limited partnerships, but I don’t think this is always the case (as discussed below).  But before we get into this discussion, lets start off with the basics, shall we?

What is an Extra-Provincial Limited Partnership?
An Extra-Provincial Limited Partnership is a few things.  First, it is a general partnership that is already is in existence.  A general partnership is the relationship that exists between two or more parties doing business in common with a view to making profit.  So, just to recap, if two individuals living in Mexico or the U.S. wanted to form an Ontario limited partnership, they would first have to have a general partnership between themselves.  Remember: an Ontario limited partnership is simply a designation granted by the Ontario statute.  Now, after being organized as a general partnership, it becomes a limited partnership – just not in Ontario.  A general partnership in Ontario becomes a limited partnership by filing and being issued a Form 3 Declaration from the Ontario government.  So the idea is that Ontario is willing to recognize limited partnerships from other jurisdictions.  That recognition is done when the Limited Partnership files a Declaration Form 3.

Now it’s important to note that I’ve generally come across two situations that involve limited partnerships formed by foreign entities: (1) a limited partnership organized outside of Ontario wishes to do business in Ontario and (2) extra-provincial persons wish to create and use an Ontario limited partnership as a legal structure but do not wish to do business in Ontario.  For the purposes of this blog, I’ll be discussing the second scenario.

What’s so special about the second scenario?  Well, it’s interesting because it is not the case that a limited partnership is formed outside of Ontario and which simply needs to register as an extra-provincial limited partnership.  The reality is that the limited partnership is being formed in ONTARIO under the Limited Partnerships Act, but it is done so by persons who are not resident or doing business in Ontario.  This can get a big confusing: it’s not an extra-provincial limited partnership, it’s just a plain old regular Ontario limited partnership.  The only difference is who is forming it.  So, just to recap, I’m going to be talking about how foreign persons (i.e. an extra-provincial corporation, such as a U.S. or Mexican company) can form an Ontario limited partnership.

Extra-Provincial License for the Corporation
OK, so here’s the situation.  A corporation is set up to be the general partner.  Lets assume, for simplicity’s sake, that this corporation is not an Ontario or even Canadian corporation (if it is, then there would need to be compliance with Ontario or Canadian corporate, tax, and securities laws with respect to that corporation).  For their part, limited partners are ready to partner up with the general partner.  How does it all fit together such that they form an “Ontario Limited Partnership”?

Well, the Ontario government will only allow an extra-provincial corporation to be a general partner if it has obtained a license under the Extra-Provincial Corporations Act.   Even if it’s not doing business in Ontario, the government here wants to know who this extra-provincial corporation is.   So they’ll want to see (among other things) information about the corporate name, head office, jurisdiction which it is created and subject to, its proposed business in Ontario, etc. They will also need to see how is the Agent for Service in Ontario.  The idea is that someone over 18 years old who is resident in Ontario or a corporation with a head office in Ontario must act as the Agent for Service of the extra-provincial corporation for the purpose of receiving service of process, notices, or other proceedings (so that service on the Agent is deemed to be service on the extra provincial corporation).  In certain situations, the Ontario government will also want an ORIGINAL Certificate of Status issued under the seal of the incorporating jurisdiction, signed by the proper person, and showing:

1. The name of the corporation;
2. The date of incorporation;
3. The jurisdiction to which the corporation is subject; and
4. That the corporation is valid and existing.

Some jurisdictions (e.g. Netherlands) do not provide these kinds of certificates, but the Ontario government still allow corporations from these jurisdictions to be registered.  Finally, the Ontario government will want to see an original NUANS name search report to make sure that there is no conflicting or confusingly similar name of the corporation which is currently in existence.  It generally takes about 3 weeks for the paperwork to be processed once the Ontario government has received it.   There are also government fees (i.e. $330) which must be paid to obtain this extra-provincial corporate license.

Registering the Limited Partnership
Now that you’ve got your extra-provincial corporate license in hand for the general partner, it’s time to register the Limited Partnership.  Now, as I said above, in the situation I’m describing, the limited partnership has not been formed elsewhere; there is no other organizing statute; so there is no extra-provincial limited partnership.  All that’s happening is the formation of a plain and simply limited partnership in Ontario by a general partner who is not a resident in Ontario (it’s a corporation formed outside of Ontario but with a license to conduct business here).  And, to simplify matters, I’m also assuming that the limited partnership is not doing business in Ontario.  So you fill out the Declaration Form 3 and pay the $220 government filing fee.  Once registered, you will need to file a renewal every 5 years.  Note: the Ontario government will not send notices out, so you better just keep your eye on the date when the limited partnership must be renewed!

Now, I’ve personally gotten into some debates with government staff as to how to go about filling out this declaration for the situation I’ve described.  I’ve spoken with managers in the government office because they seem to believe that the form should be filled out in a certain way.  I would strongly urge you to contact me to deal directly with government staff to prevent delays with respect to registering the LP.  They may not understand the intricacies of the Limited Partnerships Act and may simply demand documentation which is not needed.  It’s quite easy to make mistakes, given that the laws concerning limited partnerships are not always clear.

Carrying on the business of the partnership
Now that the limited partnership has been established, business can be conducted.  As I’ve previously blogged about, in Ontario, the limited partnership is not a legal entity capable of holding or dealing with limited partnership property.  Rather, it is the general partnership, which has been entrusted with managing the affairs of the limited partnership, which does so on its behalf.

Taxes!
So finally, we come to the issue of taxes.  In Canada, a Ontario limited partnership is not a separate legal entity (unlike a corporation) or a”person”.  I have previously blogged about this here.  As such, they are not considered to be taxpayers (i.e. who are, indeed, “persons”) under the Canada Income Tax Act.  Rather, partnership income, losses, assets, and liabilities are all attributable to the partners as per the limited partnership agreement. As per the Canada Income Tax Act, partnerships do not file separate tax returns. They file annual “information returns” setting out their income and details of the partners who are entitled to that income. It is the partners who are required to pay income tax. The limited partnership is simply a flow-through entity.

So to recap: the net income of the partners (for income tax purposes) of a limited partnership is determined by figuring out the net income of the limited partnership.  To figure out the net income of the limited partnership, the Act says that you look at it as if it were a separate legal person: s. 96(1)(a). So you include income and deduct allowable expenses and other credits. Then, the limited partnership’s income will be attributed to the partners (usually as per the limited partnership agreement). Each partner must report their income or losses from the partnership and pay taxes accordingly: s. 96(1)(f).

Now, if the partners (e.g. extra provincial general partner and the limited partners) of the limited partnership are resident of some country other than Canada, the issue comes up as to whether any tax is owing in Canada.  Generally, under the Income Tax Act, RESIDENTS of Canada at any time in the year are required to pay tax on their worldwide income: section 2(1).  Now, if an individual is a non-resident, then they may still have to pay Canadian income tax if they received certain kinds of income from Canadian sources – such as employment income, business income, or income derived from the sale of taxable Canadian property.  Now this stuff is somewhat complicated and long-winded, so I think I’ll dedicate another blog to the topic of taxation of partners of a limited partnership if they are resident or non-resident in Canada.

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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 forming a Delaware LLC, you should seek professional assistance.  If you would like me to coordinate with U.S. counsel to form a Delaware LLC for you, you can contact me directly.

So why am I, an Ontario lawyer, talking about Delaware LLCs in this blog?  Well, for the simple reason that Canadians often use Delaware and other state LLCs as part of structuring their business.  LLCs are interesting business structures with definite advantages that should be explored.  So that’s why I’m devoting this blog to talking about them generally.  Now lets start off with the basics, shall we?

LLC?
LLC stands for “Limited Liability Company”.  A Delaware LLC is a Limited Liability Company that is formed and governed in the good state of Delaware under the Limited Liability Company Act.  That Act was enacted in 1992.

Why is an LLC so special?
An LLC is a hybrid entity: part partnership, part corporation.  It takes the best and worse of both worlds.  As a partnership, it can be disregarded for tax purposes.  This means it’s a flow through entity.  So the members (not shareholders) who own the units of the LLC receive the profits and losses and are taxed accordingly.  This differs from a corporation, where the corporation is a separate legal entity (it gets taxed) and then the shareholders receive dividends (they get taxed again!).  So, as a partnership-like structure, it has tax advantages.

But it also conveys limited liability status on its members and managers: the Act provides that, unless an operating agreement of the LLC says otherwise, the members and managers of the LLC have limited liability to 3rd parties for the debts and obligations of the LLC:

§ 18-303. Liability to 3rd parties.

(a) Except as otherwise provided by this chapter, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the limited liability company, and no member or manager of a limited liability company shall be obligated personally for any such debt, obligation or liability of the limited liability company solely by reason of being a member or acting as a manager of the limited liability company.

(b) Notwithstanding the provisions of subsection (a) of this section, under a limited liability company agreement or under another agreement, a member or manager may agree to be obligated personally for any or all of the debts, obligations and liabilities of the limited liability company.

Operating Agreement
Unless the LLC has an operating agreement that says otherwise, the LLC is governed by the Act.  The Act has various default rules.  This is akin to an Ontario partnership.  It will cover things such as:

• Formation and Purpose
• Term
• Capital Contributions
• Allocations and Distributions
• Company Interests (transfer, redemptions, etc.)
• Members (e.g. admission, removal, resignation)
• Managers
• Administrative Matters (e.g. accounting, tax, etc.)
• Termination and Dissolution
• General Matters

Ease of Creation
Delaware LLCs are easily formed.  They are not incorporated (because they are not corporations), but “formed”.  The Certificate of Formation must be filed, a registered office and agent in Delaware is required, and an Operating Agreement must be entered into (either oral or written).  Interestingly, the government provides a lot of flexibility with what people are required to do to maintain Delaware LLCs: there is no obligation to maintain books and records in Delaware, nor is the LLC required to do business in Delaware!

Costs
Filing a Delaware LLC can cost between USD$200-$600, depending on who does it and what you get (e.g. By-Laws, Unit Certificates, Seal, Minute Book, Operating Agreement, etc.). Part of that cost involves paying a $99 fee to have a registered agent who can accept service of documents (e.g. lawsuits) on behalf of the LLC.  You must also pay a $250 State franchise tax annually.  Operating agreements may cost anywhere from a few hundred to a few thousand dollars, depending on how complicated they are (think: more parties means longer to draft, review, and negotiate = increased costs!).  Finally, for those parties who want to have a manager of the LLC other than themselves, there are service providers who will do that.

So that’s it for now about Delaware LLCs…remember: if you need an Ontario lawyer to help you coordinate with U.S. counsel to form a Delaware LLC as part of your business structure, you can contact me directly.

written by admin \\ tags: both worlds, business structures, canadians, debts, definite advantages, dividends, educational purposes, legal advice, liabilities, liability company act, limited liability company, limited liability company act, llcs, ontario lawyer, operating agreement, professional assistance, separate legal entity, shareholders, state of delaware, tax purposes

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, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements.  I should know – I’m one of them and you can contact me directly.

This is the 6th blog I’ve written about limited partnerships.  In this blog, I’ll be talking more about Ontario limited partners, who they are, what their rights are, and how they can transfer their interest.  Be sure to read up on the first 5 sets of blogs about limited partnerships, which included gold nuggets on limited partnerships generally, limited partnerships as separate legal entities, securities and tax implications, how limited partners could lose their limited liability status, etc.

Who is a Limited Partner?
First, an Ontario limited partner is one of two types of partners required to form a “limited partnership” under the Ontario Limited Partnerships Act.  The other type of partner is called a general partner.  Unlike a general partner, a limited partner’s liability is limited up to their contribution (a general partner’s liability is unlimited).

What is a Limited Partnership?
A limited partnership is a statutory vehicle.  Granted, it is a partnership (i.e. two or more people carrying on business together with a view to a profit).  But it is governed by the Act and any limited partnership agreement (just as a general partnership would be governed by the Ontario Partnerships Act and any partnership agreement).  And to be a limited partner in a limited partnership, you must deliberately file a Declaration and pay a fee (e.g. $210 in Ontario) to create a limited partnership.  So you can’t accidentally have a limited partnership.  And you can’t assume you are a limited partner with limited liability without first achieving that status under the Act.

Rights
So with that now said and done, we move on to the rights of limited partners.  Essentially, they have a number of rights under the Ontario Limited Partnerships Act, including:

• the right to inspect and copy the books of the limited partnership (s. 10(a)):
• the right to be given a complete and formal account of the limited partnership’s affairs (s. 10(b));
• the right to obtain dissolution of the limited partnership by court order (s. 10(c));
• the right to share in the profits and other compensation of the partnership (s. 11(1)(a)), subject to other provisions of the Act;
• the right to have their initial contribution returned (s. 11(1)(b)), subject to other provisions of the Act;
• the right to examine the “state and progress” of the limited partnership business and advise as to its management (s.12(2)(a));
• the right to act as a contractor for or an agent or employee of the limited partnership or of a general partner (s.12(2)(b));
• the right to act as a surety for the limited partnership (s.12(2)(c)).

Contribution
The biggest distinguishing factor in being a limited partner is that generally your liability exposure is limited to your contribution.  What is their contribution, then?  Well, it’s not services.  It must be money, property or both: s. 7(1).  Just like with the “Stated Capital” of a corporation, the limited partner’s contribution must be recorded in the limited partnership’s books.  For those who don’t know, the “Stated Capital” is a simple document that shows, with respect to a corporation, who its shareholders are, how much they’ve given the corporation for their shares, the number and class of shares they own, etc.  You get the point.  But what’s important to note about the limited partner’s contribution to the limited partnership is that ANY PERSON has the right, under the Act, to inspect the records of the limited partnership at the registered head office (or the limited partnership’s attorney’s office) during normal business hours AND may make copies of and take extracts!  Failure to comply could constitute an offence under the act and be punishable on conviction to a fine of up to $2,000 (for an individual) or $20,000 (for a corporation).

Transferring their Interest
The Act says (at s. 18(1)) that a limited partner’s interest is assignable.  Well, that’s a good thing.  But there’s an important caveat: is the limited partner a “substitute partner”?  If no, then the assignee (the person acquiring the limited partner’s interest) will ONLY be entitled to receive the assignor’s (the limited partner) contribution to the limited partnership and share of the profits or other compensation.    OUCH!  What about rights to inspect the limited partnership’s records and books or be given information or account about matters affecting the limited partnership?  Nope.  Sorry.  No rights there!  So says s. 18(3) of the Act.

So what is a “substitute partner” and what kinds of rights and duties, etc. do they enjoy after receiving or being assigned the interest of the limited partner?  Well, a “substitute partner” is an assignee who either receives permission from all the other partners in writing to be a “substitute partner” or who is designated by the assignor (i.e. the limited partner) under the authority of the limited partnership agreement.

OK, so what happens when an assignee becomes a “substitute partner”?  Well, essentially they have all the rights and powers and are subject to the same restrictions, duties, obligations, etc. as the limited partner who assigned their interest.  There are a few points worth mentioning here.  First, the “substitute partner” will not inherit or be subject to the liabilities of the limited partner which weren’t known at the time the limited partner became a limited partner and which could not be ascertained from the partnership agreement, the declaration or the record of limited partners.  Second, the assignor (limited partner) will not, even in assigning their interest, be relieved of their obligation to pay for any difference between their actual and recorded capital contribution (s. 16 of the Act and s. 18(7)).  Furthermore, the assignor (limited partner) will not, in assigning their interest, be relieved of liability arising from false or misleading statements in the partnership record that they were aware of but did not take steps to correct (s. 30 and s. 18(7)).

Look, I know this stuff gets confusing – particularly if you’re not a lawyer – so if you want to talk with a lawyer about limited partnerships, being a limited or general partner, setting up or dissolving a limited partnership, etc., then make a post on Dynamic Lawyers or contact me directly.

written by admin \\ tags: limited partnership, limited partnership agreements, limited partnerships, partner status, professional assistance, securities laws, separate legal entity, tax purposes

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 getting, varying, or terminating child support in Ontario, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Brampton, Hamilton, and other Ontario family law lawyers registered on Dynamic Lawyers who can offer information, advice, and assistance with respect to helping you get, vary, or terminate child support.

As a follow up to my recent blog about child support obligations in Ontario and limitations on that obligation, in this blog, I’ll be discussing what the relevant time period is for determining a parent’s ” income” for the purpose of paying child support (note: this blog won’t deal with the timeline for determining income in respect of retroactive payments).

Remember: a parent’s child support obligations depends on whether they meet certain legal tests.  If they are obliged under law to pay, the next question becomes: how much do they need to pay?  Well, that depends on their income.  But it’s not just any “income” (e.g. income for tax purposes, etc.).  It’s actually a complicated legal analysis of what constitutes their income.  I’ll try to shed some light in the next few posts about relevant issues when trying to determine a payor’s income.

One such issue that comes to mind is:  what is the relevant time period for determining a parent’s “income” for child support purposes?

In a nutshell, the most current information must be used.

The Child Support Guidelines prescribe a method to determine child support. The starting point is the parent’s total income, as shown on his or her income tax return (latest T1 General form issued by the Canada Revenue Agency), and as adjusted in accordance with Schedule III of the Guidelines [s. 16]. The definitions section of the Guidelines provides that, where any amount is to be determined on the basis of specific information, the most current information must be used [s. 2(3)].

In Ward v. Ward, 44 R.F.L. (4th) 340, the Ontario Divisional Court stated the following with respect to the Federal Child Support Guidelines (which mirror the Ontario Child Support Guidelines):

23 In order to identify the table amount of child support the income of the petitioner must be ascertained. In the usual case the income of the payor-parent is identified by using the most current information available (pursuant to s. 2(3) of the Guidelines) and by referring to the “Total income” found in his or her T1 General form issued by Revenue Canada (pursuant to s. 16 of the Guidelines).

This view was reiterated in Muir v. Muir, 44 R.F.L. (4th) 340, where the Ontario Court of Justice observed:

23 I also note subsection 2(3) of the Guidelines which reads as follows:

Most current information – Where for the purposes of these Guidelines, any amount is determined on the basis of specified information, the most current information must be used.

Worth mentioning, however, is that courts have recognized that the amount of income disclosed on the tax return need not necessarily be used: prior to the end of a taxation year and in certain circumstances, a parent can apply to vary child support based on an anticipated reduction in income.

Finally, the court may consider the parent’s last 3 years of income and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income or receipt of a non-recurring amount during those years [s. 17(1)]. The objective is to determine the fairest indicator of the individual’s income. Once the parent’s annual income is ascertained, the Ontario Child Support Tables set out the amount of monthly child support payable.  For more on using the tables or a child support calculator to determine child support obligations, please refer to my other blogs.

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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 drafting, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements.  I should know – I’m one of them and you can contact me directly.

Following up on my recent blogs about Ontario limited partnerships, what they’re all about, how a limited partner can lose their limited partner status, and how a limited partnership is not a separate legal person, I thought I would blog about an important yet often overlooked aspect of using limited partnerships to raise money for an investment: complying with securities laws.

Ontario limited partnerships are generally used for tax planning purposes.  A group of persons want to start a business.  They realize that the business will generate losses in the first few years (which is normal when you’re first starting out).  They want to offset their income with those losses.  If they use a corporation, the losses will get trapped in the corporation.  The corporation can carry them forward (to a certain extent), but cannot transfer those losses through dividends to the shareholders.  Since a limited partnership is simply a flow-through structure and not a separate legal entity, its losses can be attributed to its partners.  So, to recap: Ontario limited partnerships are generally used for tax purposes (since they offer no advantages to mitigate liability vis-a-vis a corporation).

Now, we move on to securities laws implications.

When limited partnerships are being established, it’s not just a matter of complying with the provincial partnerships acts, the Income Tax Act, and any partnership agreement that may exist between the partners.  If the limited partnership is going to be offering “securities” (as defined under the Ontario Securities Act) through the offering of limited partnership interests that fall under that definition, then the limited partnership will need to comply with dealer registration, prospectus requirements, and other onerous obligations before it is allowed to offer those securities.  The limited partnership can, however, avoid complying with those securities law obligations if it qualifies for an exemption.  You should definitely consult with a business lawyer familiar with these exemptions BEFORE offering limited partnership interests. Also keep in mind that you’ll need to comply in ALL of the jurisdictions you’re proposing to offer securities.  So you’ll need to consult with lawyers about compliance in those jurisdictions (and the rules are not necessarily the same wherever you go!).  All too often, parties don’t think about complying with securities laws until it’s too late.  Then it’s only down hill from there: Ontario Securities Act proceedings which could result in worse things (e.g. civil litigation, bankruptcy, divorce, etc.).  OUCH!!!

written by admin \\ tags: business lawyers, educational purposes, first few years, legal advice, limited partnership agreements, limited partnerships, ontario business, partner status, professional assistance, securities laws, separate legal entity, shareholders, tax planning, tax purposes

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, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements.  I should know – I’m one of them and you can contact me directly.

So following up on my previous blogs about limited partnerships (e.g. what they’re all about and how a limited partner can lose their limited partner status), I thought I would dedicate this blog to address the following question: is a limited partnership a separate legal entity from its partners?

The answer is “no”.

A limited partnership is a type of partnership governed by the Ontario Limited Partnerships Act, the Ontario Partnerships Act, and the limited partnership agreement that exists between the general and limited partners (if any).  There is nothing that confers on a limited partner the status of being a separate legal person.

With these things being said, there are a number of legal situations where a limited partnership appears to be a separate legal entity.  For example, a limited partnership:

• can sue and be sued;
• can file its own income taxes;
• can be petitioned into bankruptcy; and
• has its own property (for the purposes of dissolution and redistribution);

But don’t get confused: these instances are mere conveniences granted by statutes to a limited partnership to recognize it temporarily for various purposes (e.g. civil litigation, tax, bankruptcy, etc.).  Always remember that a limited partnership is simply a special kind of partnership that is not a separate entity from its partners.  Think of it like a marriage between persons…

written by admin \\ tags: business lawyers, Civil Litigation, legal person, legal situations, limited partners, limited partnership agreement, limited partnership agreements, limited partnerships, ontario business, ontario limited, partner status, partnerships act, professional assistance, separate legal entity, tax purposes

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, reviewing, interpreting or resolving disputes concerning partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership agreements.  I should know – I’m one of them and you can contact me directly.

This is a follow up to my recent blog about partnership agreements (Part 1), which dealt with the following issues in partnership agreements: date, parties, and partnership name.  In this blog, I’ll be discussing the Place of the Partnership and a description of the Business of the Partnership. Keep in mind that these are different from limited partnerships and limited liability partnerships.  Please also further keep in mind that general partnerships are governed by their agreements and provincial statutes.

Place of Business
Identifying the place of business is important for record-keeping purposes.  Partners have rights to inspect partnership documents and records (e.g. financial records, etc.).  As such, there should be a clear indication of where the primary place of business or head office is located for the purpose of allowing partners to inspect and make copies of these records.

Business of the Partnership
Here, you’ll want to identify the business of the partnership (e.g. you can specify that the partnership will carry on the business of X for X in the geographic region of X).  It’s important for a couple of reasons.

First of all, non-compete clauses and other restrictive covenants generally use the “Business of the Partnership” as defined in the partnership agreement as the basis to limit partners’ ability to compete during and after the term of the partnership agreement.  Just make sure a lawyer review this so that it is properly defined (i.e. broadly enough or narrowly enough, depending on what the partners’ particular interests are).

Second, the business of the partnership – properly defined – should help limit the scope of a partner’s authority to bind  other partners. This is important because partners may sometimes act outside the scope of their authority (e.g. beyond the defined “business of the partnership”); if it can be said that the partner acted within the scope of the “business of the partnership” (based on a factual matrix), then one partner may inadvertently bind the other partners and make them liable for that partner’s acts and omissions.  That’s why it’s good to have a clearly written and agreed-upon  “business of the partnership”and to have it reviewed to ensure compliance!

Why is it so important?  Take the following example (the leading case in Ontario).  In McDonic v. Hetherington, 96 O.A.C. 289, 29 B.L.R. (2d) 1, 142 D.L.R. (4th) 648 (Ont. C.A.), two clients (sisters) sued a lawyer and his law firm partners in respect of investments which the lawyer had been making on their behalf.  The law firm had a substantial mortgage business and regularly invested funds for its clients.  The lawyer (without the other partners knowing) made investments on behalf of the sisters without telling them about the nature of the investments he was making, getting their approval, or protecting their interests.  But that lawyer used the law firm’s facilities, services, and employees to transact that business.  The sisters sued the lawyer and his law firm partners for negligence and breach of fiduciary duty (among other things).  The Ontario Court of Appeal found the partners liable because that one lawyer’s activities were WITHIN the scope of the law firm’s ordinary business and were performed within the implied or apparent authority of the partners. The Court of Appeal found there was nothing to suggest to the clients that the lawyer was acting in any capacity other than as a partner of the law firm.  The fact that the lawyer acted negligently or dishonestly or that partners weren’t aware of any of his business dealings didn’t matter! As such, the other partners were jointly and severally liable (judgment was: $10,198 for one sister and $231,557 for the other sister plus legal costs!) under the Ontario Partnership Act for the acts of that one partner. This goes to show that partnerships should be mindful of the business carried on by the partners!

Finally, the “business of the partnership” should likely be one of those clauses that requires the unanimous consent of all the partners to change it because of its importance.

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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 drafting, reviewing, interpreting or resolving disputes concerning partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership agreements.  I should know – I’m one of them and you can contact me directly.

As a follow up to a previous blog I wrote about basic partnership agreement templates, I thought it would be worthwhile to get into greater detail concerning the nuts and bolts of partnership agreements.  This is the first of a series of blogs about this topic.  In this blog, I’ll be discussing the Date, Parties, and Partnership Name considerations in a general partnership agreement for Ontario. Keep in mind that these are different from limited partnerships and limited liability partnerships.  Please also further keep in mind that general partnerships are governed by their agreements and provincial statutes.

Date
What is the date of the agreement?  This is important because, at the end of the agreement, there will typically be a provision saying that the agreement comes into force on the date first written above.

Parties
Here you want to be very clear as to who the parties are that are entering into the general partnership. Use full legal names and address.

Keep in mind that residency of the partners is important for tax purposes: if there is one partner who is considered to be a foreign resident under the Canada Income Tax Act, then the partnership cannot be considered a “Canadian partnership” for tax purposes: s. 102(1).  This is an interesting provision because it allows the CRA to essentially look through the partnership vehicle (keep in mind that it’s a flow through entity and not a separate legal person) to see who the partners are.

If one of the partners is a non-resident of Canada, then the partnership is not a “Canadian partnership”.  This has a number of significant impacts.  First, this non-resident status effectively denies a rollover (i.e. tax deferral) on partner transfers of certain property into the partnership (s. 97(2)); these rollovers are available only to “Canadian partnerships” in the form of an election. Second, non-resident partnerships are denied a rollover (i.e. tax deferral) on partnership property that is distributed to the partners on the dissolution of the partnership (s. 98(3)); again, these rollovers are available only to “Canadian partnerships”. Third, pursuant to ss. 212(1) and 212(13.1)(a), if a non-resident partnership pays an amount that is deductible to it under the Act to a non-resident partner, then the non-resident partner will be required to withhold 25% taxes on designated income (e.g. management fees, interest, rents, royalties, dividends, etc.) which it receives from the non-resident partnership! Ouch! Finally, non-resident partners may be liable to pay Canadian withholding taxes (e.g. 25%) when they dispose of certain taxable Canadian property (e.g. shares of Canadian companies, Canadian real estate, certain partnership and trust interests, etc.): s. 116(5). Therefore it’s important for tax purposes to know who the partners are and whether they are residents of Canada.

If you’re dealing with a corporate partner, be sure to get a lawyer to do the diligence on whether the corporate partner properly exists and has all the necessary powers and approvals to enter into the partnership.

A common question comes up: can a general partnership be a partner of a general partnership?  The answer is “NO”.  General partnerships are governed by the Ontario Partnerships Act and the written partnership agreement between the parties (which can override certain default rules of the Act).  That Act states in s. 3 that a partnership is entered into between “persons”.  Unfortunately, “persons” is not defined in that Act.  So we turn to s. 29(1) of the Ontario Interpretation Act, which defines a person to include “a corporation and the heirs, executors, administrators or other legal representatives of a person to whom the context can apply according to law”.  Since there’s no reference to a “partnership” as being a “person” capable of entering into a “partnership” under s. 3 of the Partnership Act, a general partnership cannot be a partner of a general partnership!  Phew…I hope you follow that logic!

Partnership Name
You need to specify here what the partnership name will be.  It is this name that the partnership must carry on business using.  You might want to do name searches to make sure that the partnership name is not being used or not used in your industry.  Furthermore, you may want to consider trademarking the name to better protect it.  The Ontario Business Names Act creates two requirements for partnership names under ss. 2(3) and 2(3.1):

2(3) No persons associated in partnership shall carry on business or identify themselves to the public unless the firm name of the partnership is registered by all of the partners.

2(3.1) No persons associated in partnership shall carry on business or identify themselves to the public under a name other than a firm name registered under subsection (3) unless the name is registered by all of the partners.

Let’s be clear here: the consequences of failing to register a partnership name does not mean that a partnership never existed.  A partnership’s existence will depend on the test set forth in section 3 of the Ontario Partnership Act and the court’s interpretation of that section.   This is to be distinguished from a limited partnership, which can ONLY exist upon the registration of the limited partnership name!

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