Partnership Agreements – Planning for the End
By LawyerLinx,
January 18, 2016

Because it is relatively simple to set up, the partnership is a common business model adopted by many aspiring entrepreneurs. Once you have decided that the partnership model is right for you, setting up a partnership in Canada involves the creation of a legal entity known as the partnership.  Starting a new business is an exciting time and it’s easy to forget the smaller details of starting a partnership while focusing on the Big Picture. You and your partner may have discussed things like division of profits and day-to-day management but what about the often unsavoury topic of dissolution? What happens when the partnership comes to an end?

These questions may naturally arise in discussions prior to establishing the partnership. Legally, partners may choose to define their relationship by a verbal agreement or rely on the strict confines of applicable legislation. However, it is highly recommended, as in any business venture, to sit down with your partner(s) and a business lawyer to draft a formal partnership agreement. Having an open and documented discussion about the partnership helps eliminate ambiguities, miscommunications and possible conflict down the line.

Partnership Agreement

A partnership agreement is a contract between business partners, usually created at the inception of the partnership and is used to establish the rights and obligations of the partners. It defines responsibility, distribution of profits or losses, and generally governs the running of the business. While it sound simple enough, a savvy businessperson understands the complexities that come with running a business, let alone a partnership. Consequently, partnership agreements can become complicated and lengthy. With the help of an experienced lawyer, partners can ensure a new partnership is based on a comprehensive agreement that leaves all parties feeling confident and ready to embark on their business venture.

A partnership agreement will include clauses addressing:

  • The formation of the partnership, including terms and the length of the partnership, business activities, as well as outlines how new partners can join the business.
  • Financial matters, including capital contribution and financial requirements of the partners, the sharing of profits or losses, and an indemnification clause.
  • Management of the business, including delegation of authority, calling of meetings and management of partnership property.

A comprehensive partnership agreement will also include a section outlining what happens when the partnership comes to an end, also known as a dissolution strategy.

What happens if a partner wants out?

Partnerships dissolve for many reasons; partners lose interest, retire, or wish to pursue other opportunities. Just as with any personal relationship, the end of a business partnership may be a difficult and emotional time for individuals involved. With high stakes and competing interests, knowing your rights and obligations as a partner is vital for a quick and clean dissolution or “break-up”.

Dissolution is not always the only answer, and a good partnership agreement will provide possible alternatives to dissolution. They may include,

  • Changing the weighting of the partnership, i.e. one of the partners transfers more control to another
  • A clause allowing you to sell your share or buy your partners share

If these solutions, for whatever reasons, are not viable options, the next step is to dissolve the partnership.

This is where a good partnership agreement is invaluable. Creating a dissolution strategy at the beginning of a partnership (when everyone is getting along) provides a reasonable and ideally, fair method of dissolving the business.

How can a partnership be terminated?

Some events may automatically trigger the dissolution while others may trigger a right or obligation. A common provision found in this section will allow for the dissolution of the partnership upon the unanimous resolution of all the partners or alternatively, the unanimous written agreement to terminate the partnership.

Upon dissolution, the partnership shall terminate and the partnership agreement should provide direction for winding up the business. This involves the liquidation of assets, the repayment of debts and obligations and finally, the distribution of any surplus amongst the partners.

The importance of an unambiguous and comprehensive partnership agreement cannot be understated as it may carry huge repercussions. The beauty of a partnership agreement is that is can be tailored to the needs of the partnership. While there are many standard or boilerplate agreements available, a lawyer can help your partnership customize an agreement to your unique needs.

What if my partnership agreement does not have a dissolution strategy?

If your Partnership Agreement does not include a dissolution strategy your rights will be governed by your verbal agreement and legislation, in Ontario for example, the PARTNERSHIP ACT R.S.O. 1990 would apply. If the business relationship has deteriorated, it may become difficult to reach an agreement that pleases all parties. At this point the partners could come together and try to negotiate a dissolution strategy. Easy enough if the dissolution is amicable and much more complicated and costly if it is not. The use of a Mediator may be necessary, and can help avoid the final more costly and taxing solution of taking your dispute to court.

Planning for the end of your business is not only practical, it’s necessary. Recognizing the very real possibility that the partnership will one day come to an end allows for partners to openly discuss their concerns at the early stages of the partnership. Accordingly, a good partnership agreement fortifies a strong business relationship and is an excellent foundation for any successful business venture you and your partners choose to pursue.

***

This article should not be relied upon as legal advice - the comments may not be applicable to you and may not be up to date. If you have any questions, you should contact a lawyer.