Are you in a Partnership?

Written by Charlotte Kelso
JD Candidate 2024 
UCalgary Law

Ordinary Partnerships

A partnership is a relationship between two or more people (i.e., partners) carrying on a business together with the aim of making a profit, excluding corporations.[1] A firm of any size in any industry can be classified as a partnership if it meets this definition.[2] There are three types of partnerships: ordinary partnerships, limited partnerships, and limited liability partnerships. This article focuses on ordinary partnerships, which I will refer to simply as "partnerships". In Alberta, the Partnership Act governs partnerships, with similar legislation in place across Canada.

The key risk associated with partnerships is that a partner may be personally liable for any debt or obligation that the firm is liable for.[3] For example, if the firm is in default of a bank loan, the bank can recover the debt from the partners' personal funds and assets if needed. Liability is shared amongst partners. This means that an individual partner is financially responsible for the actions and decisions of the other partners during the course of business. Given the liability risks, it is important to know if you are in a partnership.

Identifying a Partnership

To be a partnership, a business relationship between parties must meet the definition of a partnership. There are three “essential ingredients” of a partnership.[4] First, the parties must carry on a business. Carrying on a business includes the early and preparatory stages of a venture.[5] The duration of the business venture does not need to pass any certain threshold.[6] Second, the business must be carried on “in common” by the parties. In other words, they must be carrying out the same business in tandem. Finally, the business must be carried on with the aim of making a profit. Aiming to make a profit does not require that the firm actually make a profit.[7]

Whether the “ingredients” are present is determined by looking at the circumstances and facts of the relationship. Materials like business licences in the partners’ names, correspondence between the parties, and tax returns showing shared profits can point to a partnership. The parties may have an agreement in writing that they have formed a partnership. While this can be indicative of a partnership, it is not necessarily decisive.[8] A lack of evidence that the parties intended to divide profits or carry on a business together suggests that there is no partnership.[9] Where there is no written agreement, words and actions that are consistent with a partnership may establish a partnership.[10] In sum, a partnership is identified based on the circumstances of each business relationship.

Converting the Partnership to a Corporation
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Partnerships often represent a phase in the legal structure of a business which parties may eventually wish to transition out of, especially given the liability risks of a partnership. The Income Tax Act provides an avenue for a partnership to convert to a corporation in conjunction with the wind-up process. First the partners set up a corporation for the purposes of the transition. Then the partnership transfers property to the corporation in exchange for shares. The shares are transferred from the partnership to the individual partners. Then the partnership wind-ups up. The former partners continue on their business venture under the corporation as shareholders. [11] [12] 
 


[1] Partnership Act, RSA 2000, c P-3, at s. 1(g).

[2] Ibid at s. 1(c).

[3] Ibid at s. 11(2) and 15.

[4] Spire Freezers Ltd v Canada, 2001 SCC 11.

[5] Miah v Khan, [2000] 1 WLR 2163.

[6] Supra note 2.

[7] Supra note 2.

[8] Sproule v McConnell (1925), [1925] 1 DLR 982, 19 Sask LR 319.

[9] Big Bend Construction Ltd v Donald, 1958 CarswellAlta 33, 25 WWR (ns) 281.

[10] Sabbaugh v Rawdah, 1978 CarswellAlta 409, 16 AR 326.

[11] Income Tax Act, RSC 1985, c 1, s. 85(2).

[12] Tingle, B. C.  Start-Up and growth companies in Canada - a guide to legal and business practice (3rd ed.). LexisNexis Canada Inc, p. 36.