Sole Proprietorships and Partnerships

There are three different ways in which someone can operate a business.

Sole Proprietorship, Partnership and Corporation.

Sole Proprietorship:

This option is available to businesses owned by one person. A sole proprietor can run a business under his or her name. If a name is registered with government, one can operate business in such name.
Sole proprietors may or may not have employees.
Expenses incurred in operation of business are deductible. Some example of expenses are stationery, telephone, rent etc. If business is operated from home, sole proprietor may be eligible to deduct portion of mortgage interest, property tax and utility bills depending upon percentage of the home used for business.
Sole proprietors should keep a separate bank account for their business.
If someone wants to run a business in his own name there are no requirements to register a business name.
If someone wants to run a business under a different name, section 2 of the business act requires that the name should be registered.
Section 4 of the business act governs registration of names. Section 4(1) states that, for a prescribed fee, a name may be registered for a period of five years before it must be renewed.
Section 5(1) and 5(2) state that renewal of a business name may take place, with the payment of the prescribed fee, at any time before its expiry and, with the payment of an additional fee, up to 60 days after its expiry.
It is always recommended to search a name registration database (NUANS) to confirm that the name is not already registered by someone else.
The penalty for appropriating an existing name can be severe. Under section 6 of the business act, a person registering a similar name that has already been registered before, may be sued and end up paying heavy damages.
Business name can be registered by completing form 1 under the business names act that is submitted to Ministry of Consumers and commercial relations.
Link to form 1:
Once a name is registered, you can carry on business under that name.
Sole proprietors are liable for the debts and obligations of the business.
Section 2(6) of the business act requires the sole proprietor to “set out both the registered name and the person’s name in all contracts, invoices, negotiable instruments and orders involving goods and services.
Sole proprietorships are very simple and easy to set up and operate.

Partnerships:

There is a partnership act RSO 1990 in force for partnerships.

Partnership is defined as it is a relation between persons who carry a business to make profit.

A partner in a partnership can be a human or a corporation.

Types of partnerships:

There are three types of partnerships.

General partnership.

Limited Partnership.

Limited liability partnership.

General Partnership:

It is the most common form of partnership.
All the partners are equally responsible for the actions and liabilities of a firm.
Each partner is an agent of the firm and the other partners and has the legal authority to bind the firm and other partners.
Signing a legal instrument by any partner will bind the firm and all partners.
If a partner borrows on behalf of the firm it binds him and all the partners for repayment of the debt.
The firm may agree to limit the powers of a partner.
A deceased partner’s estate is equally subject to liabilities of the firm like other partners.
If a partner is an independent trustee for a 3^rd party and misapplies the trust funds, the other partners are not liable to this.
The estate of a deceased partner is not liable for obligations of partnership that arise after death.
Any written statement or representation made by a partner about the firm can be used as evidence against the firm.
Any legal notice issued to a partner is considered to be a legal notice issued to a firm.
According to section 20 of the partnership act, the rights and obligations of a partner may be varies by a partnership agreement.
Any property bought by a partnership belongs to partnership.
No partner can be expelled from the partnership unless there is a written agreement in place.
If a partner does not want to be a partner anymore, dissolution is the only solution.
If a partnership is created for a fixed term but remains active after the end of the term, the partnership continues to operate.
Financial records of a partnership should be available to all partners.
If a partner gets benefits privately he must compensate other partners equally.
No partner should ever operate a business that is in conflict of interest with the partnership.
All partners share profits and losses of partnership equally.
Partnership is liable to reimburse out of pocket expenses incurred by any partner.
Every partner is equally responsible to manage the business of a partnership.
No partner can be an employee of the partnership.
Any new partner should be admitted to partnership with consent of all partners.
Any disagreement can be settled with vote. A simple majority vote will decide the matter.

Partnership Agreements:

Following are some of the issues that can be addressed in a partnership agreement.

Name of the firm.
Decision of financial institution, signing authority, appointing an accountant and an auditor.
Borrowing arrangements and policies.
Initial contribution of each partner.
Purpose of partnership and limitations if any.
Limitations on authority of a partner.
Allocation of tasks.
Hiring and firing of employees.
Division of profits and losses among the partners.
Procedures regarding holidays, sick leaves etc.
Liability insurance for partnership.
Procedures for adding new partners or removal of a partner.
Procedures in the event of death, bankruptcy or mental incompetence of a partner.
Procedures for dissolving a partnership.

Registration of Name:

Section 2 of the Business Names Act requires registration of a business name of all general partnerships.

Dissolution of Partnership:

According to section 32, a partnership will dissolve automatically at the end of its fixed term.

If there is no fixed term, any partner may dissolve partnership by giving a notice to other partners.

A partnership will dissolve automatically if its business becomes illegal.

A partnership can be dissolved through court if the court is satisfied that:

A partner is incompetent.
A partner is not able to perform partnership responsibilities.
A partner has damaged the partnership’s ability to carry on business.
A partner has breached partnership agreement.

On dissolution, partnership property is first used to discharge the debts of partnership. Any surplus property is then used to pay each partner what he or she is entitled to under partnership agreement.

A partnership agreement can specify the reasons and procedures for dissolving a partnership, but it cannot amend the division of assets rules.

Advantages and Disadvantages of General Partnership:

Very simple to form and carry business.
Set up cost is very little.
Partners are free to arrange their activities.
Liability is a big issue because partners are exposed to it.
Each partner has the authority of an agent to represent and bind the partnership.
Business assets and personal assets of partners (House, car, bank accounts and RRSP) are vulnerable to third party.
Addition, withdrawal, ejection of partners or dissolution of partnership can be difficult to resolve.

Limited Partnership:

Limited partnership is governed by limited partnership act RSO 1990, C.L16
Partners can contribute to an unincorporated business venture without assuming liability of partnership.
A limited partnership will have one or more general partners and one or more limited partners.
A general partner in a limited partnership is liable for all the debts and liabilities of the partnership.
Limited partners are only liable up to their contribution to partnership.
Limited partners cannot have their names included in the firm name and also cannot take part in the control and management of the business.
If a limited partner takes part in the control of the firm, he or she is liable to all third parties just like a general partner.
A limited partner has the same right as a general partner to inspect the firm’s records.
A limited partner can have business dealings with the firm like making loans to the firm and entering into contracts with it.

Limited partners can have return of their contribution if:

The firm dissolves.
A time is specified in the partnership agreement.
On a notice of 6 months.
Any time with consent of all partners.

Limited partners can force the partnership to dissolve if their request for return of their contribution is improperly denied or if the firm is not able to meet its liabilities.

A person or a corporation can both be a general or a limited partner in a limited partnership.

All limited partnerships are required to file a declaration with the government. Registering this declaration with ministry of consumers and commercial relations will create limited partnership. Failing to register will result in the partnership losing all protection of the limited partnership act.

Registration of limited partnership lasts five years and must be renewed upon expiry. Failure to renew can cost late renewal fee.

If name or any information changes, a new declaration must be registered.

According to section 4 of the act, general partners should maintain a record of all limited partners and their contributions. This record must be available for public inspection.

Dissolution of Limited Partnership:

A limited partnership will dissolve automatically in the event of retirement, death or mental incompetence of a general partner, or if a corporation is a partner and it dissolves.

A declaration of dissolution must be filed with ministry of consumer and commercial relations.

Upon dissolution, assets of the partnership should be used to pay creditors. Remaining assets (if any) must be distributed as below:

To limited partners the share of their profit if not paid yet.
To limited partners return of their contribution.
To general partners money due to them.
To general partners for profits.
To general partners for capital investments.,

Advantages and Disadvantages:

Limited partnership allows limited partners to invest in the firm and share its profits.

Limited partners cannot bind the firm and general partners.

Limited partnership is complex and expensive to create.

Extra Provincial Limited Partnership:

Section 25 of the act allows limited partnerships created in other provinces or countries to carry on business in Ontario provided they file declaration with the ministry of consumer and commercial relations.

Section 25(4) requires the extra provincial limited partnership to create a power of attorney appointing an Ontario resident its attorney. The name and address of this attorney must be listed in the declaration and attorney must keep a copy of the power of attorney at the listed address.

Limited Liability Partnership:

It is available to only certain people.
This type of partnership reduces the partner’s potential liability.
In a limited liability partnership a partner is not liable for debts, obligations and liabilities of the partnership.
This type of partnership protects partners from liability for the negligence of other partners.
Section 44.1(1) of the act requires a written agreement for formation of a limited liability partnership.
An existing partnership can continue as a limited liability if a new agreement is made that is according to section 44.1(1).
A limited liability partnership is similar to general partnership except that partners in limited liability are not liable for liabilities which is a very big advantage.
The cost of setting up limited liability partnership is slightly higher than that of setting up a general partnership.

Disclaimer:

This presentation is for educational purposes only. It does not constitute a legal advice or opinion of any kind. Please do not use any of its contents without seeking a professional advice.

References:

The fundamentals of corporate law and procedure

Mark Walma and Patricia McCann – Smith

Publisher: Edmond Montogomery Publications Limited, Toronto, Canada

Sole Proprietorships and Partnerships

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