Partnerships are the sentimental favorites of many who wish to do business together, as either two or more, but without the creation of a distinct legal being, the corporation.

Many professionals - doctors, architects, lawyers, etcetera - operate as partnerships, many as limited liability partnerships.They often refer to their partnership business organization as a firm.

Corporations can form partnerships, with other corporations or with individuals.

Partnerships for illegal purposes are prohibited and rights or obligations in regards to an illegal partnership, as between the partners, will not be enforced by the courts.

In one well-known 1725 English case, Everett v Williams, one highway robber sued another for a fair share of their spoils, alleging a partnership. In the result, because they had to admit to robbery in order to advance the alleged business venture, both litigants were hanged and the lawyer who wrote up the claim was transported to a colony.

Many small businesses operate as partnerships, sometimes with a general partner and one or more limited partners, other times with more than one general partner and none for several limited partners. The  possibilities are endless!

PartnershipPartnerships have a long history in English common law and is based on the law of agency. When, many hundreds of years ago, English merchants sought to merge or buddy-up with another person, they did so by way of a partnership.

The rich had access to incorporation, but only the rich, as incorporation in that era required an act of Parliament and the  support of the king or queen.  Such support was generally only extended where the proposed operation benefited the state or the sovereign.

Thus, as with so many other inventions in legal history, necessity was the mother of invention.  In 1890, England enacted a Partnership Act which included the oft-cited definition, and excluding corporations:

"Partnership is the relation which subsists between persons carrying on a business in common with a view of profit."

This definition essentially continues today in the partnership legislation of other common law jurisdictions such as this from the Partnerships Act of Ontario:

"Partnership is the relation that subsists between persons carrying on a business in common with a view to profit, but the relation between the members of a company or association that is incorporated by or under the authority of any special or general Act in force in Ontario or elsewhere, or registered as a corporation under any such Act, is not a partnership within the meaning of this Act."

Partnerships can be created even though the participants never strictly set their mind to create a partnership. The rule of law is if quacks like a partnership, it is a partnership.

There are many expressions of the judicial activism to interpret or construe a partnership in a wide variety of fact patterns.

Participants in joint endeavors should be very careful that their actions do not create a partnership because a partnership comes with a plethora of nefarious consequences, especially when they are unintended.

A partnership necessarily involves more than one person - a one-person business is either a sole proprietorship or a corporation. Conversely, there is no limit to the number of persons who might enter into a partnership.

Each partnership requires at least one general partner.

Partners, of course, concern themselves primarily with using each other's skills and resources for common gain and profit. They just want to operate a business together.

But knowledge of the underlying law is essential and is codified in the relevant legislation such as these core extracts from the Ontario statute:

"Every partner is an agent of the firm and of the other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he or she is a member, bind the firm and the other partners unless the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe him or her to be a partner.

"An act or instrument relating to the business of the firm and done or executed in the firm name, or in any other manner showing an intention to bind the firm by a person thereto authorized, whether a partner or not, is binding on the firm and all the partners...."

But perhaps the most essential feature of partnership law is that each partner has an obligation to act in good faith as regards the others. In Lindley on Partnerships, the obligation s described as:

"...  the highest standard of honour."

Most properly created partnerships will have a partnership agreement, a contract between the partners that sets out the private law between them. Such an agreement would generally also include a process to be followed in the event of the departure or death of a partner, and how to include new partners, if any. Partnership agreements are a "must" for any business which proceeds on the basis of a partnership because the one certain thing about partnerships is that they usually come to an end. A partnership agreement can allow for the flow in and out of individuals as partners and thus the partnership can outlast its original  creators. Some old law firms have been kicking around for years.

Many lawyers will present to their clients a legalese partnership agreement. This does nothing for the client or the business except invite formalism.

A good partnership agreement must be a living document, one which the partners can readily understand and use to run the business.

In the absence of a partnership agreement, the partners will face the rigidity of the common law or the default provisions of the relevant partnership statute. It is far better to write your own private law.

Some typical clauses in partnership agreements:

  • The nature, address and name of the business;
  • What bank will be used;
  • Which partner will manage the business and which will manage the accounts;
  • The process for bringing in a new partner in and what the premium might be for that, if any;
  • What happens if a partner commits a misconduct, retires or dies and whether or not the partnership will buy life insurance on all or some partners;
  • What the financial investment of each partner will be;
  • How profits will be divided - the respective share of the partners;
  • The duration of the partnership and how to wind it up;
  • If a partner leaves the partnership, are there any restrictions on competing with the partnership; and
  • Dispute resolution such as mandatory arbitration.

The dream of perpetual succession is an elusive one for partnerships. Almost all partnerships inevitably end and they rarely end nicely. With a good partnership agreement, issues can be pre-determined. Otherwise, the only winners where a partnership dissolves will be the lawyers: law offices and the court houses see a steady stream of cases involving the blow-ups of partnerships.

In most cases, and unless there are tax advantages, partnerships are not to be preferred to the structure of a corporation. The law responds awkwardly to partnership and when a partnership ends, and they always do, judicial dissolution is, as always, unpredictable.