Chapter 2 Partnerships

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1 Chapter 2 Partnerships 1. General partnerships Because partnerships are normally comprised of more than one decision-maker, rules were developed by the courts to provide a framework for the relationship between the partners carrying on business together, and to determine the rights of third parties dealing with the partnership. Most of these rules have been codified in the Partnerships Act. Section 45 of the Partnerships Act provides that the rules of equity and of common law applicable to a partnership continue in force, except so far as they are inconsistent with the express provisions of the statute. Case law interprets the basic principles set forth in the Partnerships Act. 1.1 The formation of a partnership Section 2 of the Partnerships Act defines a partnership as the relation that subsists between persons carrying on a business in common with a view to profit, and contains three criteria: First, there must be a business, defined in s. 1 of the Partnerships Act to include every trade, occupation and profession. A business may be an ongoing activity or any separate commercial transaction. As a result, almost any commercial activity constitutes a business. The second element required is that there be a view to profit. If the object of the activity is charitable, social or cultural, it will not be a partnership. The third criterion is an agreement to carry on business in common and to share the profits. The agreement may be in a written contract or an oral agreement, or it may be evident from the conduct of the parties. In some instances, it may be difficult to determine whether the persons intended their relationship to be that of partners or something else. Section 3 of the Partnerships Act sets out rules for determining the existence of a partnership including control over the business; participation in management; sharing of profits; and responsibility for losses. Furthermore, in determining whether a partnership exists, the courts will look at the intention of the parties as disclosed in the partnership agreement, if any, and at their conduct. If persons wish to be partners it is not difficult for them to make the relationship clear, either by means of a written partnership agreement or, in the absence of a written agreement, by describing themselves as partners and behaving as such. A partnership will be found to exist if two or more persons carry on business in common, contribute property or services to the business, share in its net profits and its losses, and are involved in the affairs of the business. 1.2 Registration of general partnerships A partnership must comply with s. 2 of the Business Names Act, which provides that no persons associated in partnership shall carry on a business or identify themselves to the public unless the name of the partnership is registered by all of the partners, except for a limited partnership carrying on business in accordance with the Limited Partnerships Act, or in the case where the partnership identifies itself or carries on business under a name that is composed of the names of all the partners. The form of the registration is set out in ss. 2 and 3 of O. Reg. 121/91, General, made under the Business Names Act. Failure to file renders the partnership and each partner incapable of maintaining a proceeding in any court in Ontario in connection with the business carried on by the partnership, except with leave of the 11

2 CHAPTER 2 BUSINESS LAW court (s. 7). Failure to file a registration is also an offence under s. 10 of the Business Names Act. 1.3 Characteristics of general partnerships Sections 6 through 19 of the Partnerships Act govern the relationship of partners to persons dealing with them. These provisions are mandatory and cannot be varied by agreement. Particular attention should be paid to the following: No separate legal existence While the persons who have agreed to be partners are referred to collectively as a firm, and the name under which their business is carried on is called the firm name, a partnership is not a separate legal entity from the partners, which compose it. Initially, at common law, the effect of this doctrine was that lawsuits could only be brought by or against partners; they could not be brought in the name of the firm. This has since been changed by legislation. Rule 8.01 of the Rules of Civil Procedure enables partners carrying on business in Ontario to sue or be sued in the firm name. Another effect of the doctrine that a partnership is not a separate legal entity is that a person cannot be both a partner and an employee of the partnership, because no person can enter into a contract with himself or herself Agency Each partner is the agent of the partnership and the other partners when acting in the normal course of partnership business or in what reasonably appears to be so (s. 6). Accordingly, when acting as a partner, one partner s action binds all the partners pursuant to the law of principal and agent. Only when it is apparent that the partner is not acting within the scope of the firm s normal business activities, or when a third party knows that the partner has no authority to act for the firm in that particular matter, will the partner not bind the partnership (ss. 6 through 9) Liability In keeping with this agency relationship, each partner in a firm is jointly liable with the other partners to the full extent of his or her personal assets for all debts and obligations of the firm incurred while a partner. Judgment against, or release of, one partner bars action against the others (s. 10). Upon death, a partner s estate remains severally liable for partnership debts and obligations so far as they remain unsatisfied, subject to the prior payment of his or her individual debts (s. 10). In the case of tortious liability, the firm is liable, and each partner is jointly and severally liable, to the same extent as the wrongdoing partner for any penalty, loss or injury caused to a non-partner by the wrongful act or omission of a partner acting in the ordinary course of the firm s business or with the authority of the partners (s. 11). If a partner, acting within the scope of apparent authority, receives property of a third person and misapplies it or a partner misapplies property of a third person received by the firm in the course of its business, the firm is liable, and each partner is jointly and severally liable, to make good the loss (s. 12). A partner is not liable to the creditors of the firm for anything done before he or she became a partner. However, a retired partner remains liable for partnership debts or obligations incurred before retirement unless he or she is discharged by an agreement with the remaining partners and the firm s creditors. Under the Partnerships Act, a retired partner can formally achieve this retired status with persons who had not had dealings with the firm before his or her retirement, by publishing an advertisement in the Ontario Gazette regarding retirement. Other persons who did deal with the firm when the retired partner was a partner should be given notice of retirement (ss. 18, 36) Duty of loyalty and good faith Because of the agency relationship between partners and the resulting exposure to seizure of one partner s individual assets in satisfaction of liabilities arising from another partner s actions, the law places each partner under a duty to act at all times towards the other partners loyally and in good faith from the time of negotiating the partnership s formation until its affairs are finally wound up. This is the cardinal principle of the internal law of partnerships, which is found in the case law but is not stated expressly in the 12 LAW SOCIETY OF UPPER CANADA: NOT TO BE USED OR REPRODUCED WITHOUT PERMISSION

3 PARTNERSHIPS CHAPTER 2 Partnerships Act. However, the concept is reflected in s. 29, which requires a partner to account to the firm for any benefit derived from a transaction relating to the partnership or partnership property, and in s. 30, which prohibits a partner from carrying on a business competing with that of the firm without the consent of the other partners Partnership property Although a partnership is not a separate legal entity from the partners, all property contributed by the partners to the partnership or purchased in the course of the partnership business is called partnership property (s. 21). It is the property of the partnership and is not divisible among the partners. This is another example of the tendency to view a partnership as a unit for some purposes. The partner s right is a right to a division of profits on the basis agreed upon by the partners, or on an equal basis if there is no other agreement as to how the profits are to be shared (s. 24). A partner is entitled only to the sale and division of the proceeds of partnership property on dissolution of the partnership, after the discharge of all liabilities of the partners (s. 39). 1.4 Relation of partners to one another The terms of a partnership are usually expressed in an agreement between the partners that will govern their relationship. However, absent this partnership agreement, the terms of the partnership will be determined by the default provisions contained in ss. 20 to 31 of the Partnerships Act including the following: All partners share equally in the capital and profits of the business, and must contribute equally to the losses (s. 24.1). The firm shall indemnify partners for payments made or personal liabilities incurred in the ordinary course of business or for the preservation of the business or partnership property (s. 24.2). Partners are not entitled to interest on their capital contribution (s. 24.4). Each partner may take part in the management of the partnership business (s. 24.5). Any differences arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change in the nature of the partnership business can be made without the consent of all partners (s. 24.8). (This focus on the numerical majority of the partners involved is normally modified in the partnership agreement to reflect the economic interests of the partners, where levels of participation or economic interest are not always equal.) Every partner must account to the firm for any benefit derived from any use of the partnership name, property or business connection (s. 29). All profits from a competing business carried on by a partner without the consent of the other partners must be accounted for (s. 30). 1.5 Dissolution of partnerships Sections 32 to 44 of the Partnerships Act are concerned with the dissolution of the partnership. In the absence of any agreement to the contrary, a partnership is dissolved on the expiration of the term fixed for its existence; at the termination of the single adventure or undertaking for which it was entered into; if entered into for an undefined time, by a partner giving notice to the other partners of his or her intention to dissolve the partnership on the date mentioned in the notice, or, if no date is given, on the date of the notice s communication; and by the death or insolvency of a partner (s. 33(1)). If any of these events of dissolution are not appropriate, they should be expressly excluded by specific written arrangements between the parties. A partnership is, in every case, dissolved by the happening of any event that makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership (s. 34). On application by a partner, a court may order dissolution of the partnership in the circumstances provided in s. 35 of the Partnerships Act. LAW SOCIETY OF UPPER CANADA: NOT TO BE USED OR REPRODUCED WITHOUT PERMISSION 13

4 CHAPTER 2 BUSINESS LAW 2. Limited partnerships A limited partnership may be formed to carry on any business that a general partnership may carry on. The principal feature of a limited partnership is that the liability of each partner is limited to the amount of money or other property that partner contributes (pursuant to s. 7(1) of the Limited Partnerships Act, a limited partner may contribute money or property to a limited partnership but not services) or agrees to contribute to the limited partnership as stated in the record of limited partners that the limited partnership is required to maintain (Limited Partnerships Act, s. 4). 2.1 Formation of limited partnerships A limited partnership is formed by filing a declaration with the Ministry of Government Services signed by all the general partners and stating, among other things, the firm s name, the general nature of its business, the names and addresses of the general partners and the address of the principal place of business in Ontario of the limited partnership. A declaration expires every five years but may be renewed by filing a new declaration before the expiry date (s. 3(3)). If the firm name is changed, a new declaration must be filed. If there is any other change in the information in the declaration on file, a declaration of change must be filed with the Registrar of Partnerships. A change is not effective for the purposes of the Limited Partnerships Act until a declaration of change is filed with the Registrar (s. 19). A limited partnership is subject not only to the provisions of the Limited Partnerships Act, but the Partnerships Act, the Business Names Act and the common law as well, to the extent that the latter three bodies of law are not inconsistent with the provisions of the Limited Partnerships Act. A limited partnership must consist of one or more persons who are general partners and one or more persons who are limited partners (s. 2(2)). A person may be a general partner and a limited partner at the same time in the same limited partnership (s. 5). A person is defined in the Limited Partnerships Act to include, among other things, an individual, a sole proprietorship and a corporation. 2.2 Characteristics of a limited partnership A limited partner is basically a passive investor rather than an active participant in the operation of the limited partnership. Limited partners share the profits of the limited partnership in proportion to their contributions, unless there is a limited partnership agreement, which gives priority to one or more limited partners as to profits (s. 14). No profits may be paid out to a limited partner or to a general partner if the payment would reduce the assets of the limited partnership to an amount that is insufficient to discharge the liabilities of the limited partnership to persons who are not general or limited partners (s. 11(2)). A limited partner may also loan money and transact business with the limited partnership, and will rank equally with general creditors in respect of claims arising from such loans or transactions. A limited partner may not hold any limited partnership property as collateral security for a loan to the limited partnership. Nor may a limited partner receive any payment ahead of a creditor that is not a partner, if the assets of the limited partnership are not sufficient to discharge partnership liabilities to such creditors (s. 12(1)). Subject to the terms of a limited partnership agreement, limited partners share in the assets of the limited partnership in proportion to their contribution in respect of any profits or return of contribution (s. 14). A limited partner is entitled to the return of his or her contribution in the following circumstances: dissolution of the partnership; at the time specified in the limited partnership agreement; after six months written notice to all partners if the agreement is silent; or when all partners consent to the return of the contribution. In order for the contributions to be returned there must be sufficient limited partnership assets to pay all liabilities, except liabilities to general partners and to limited partners for their contributions, and the partnership agreement must be terminated or amended to reflect the reduction in the contribution being returned. A limited partner has the same rights as a general partner to inspect the records of the limited partnership and to receive full disclosure of the 14 LAW SOCIETY OF UPPER CANADA: NOT TO BE USED OR REPRODUCED WITHOUT PERMISSION

5 PARTNERSHIPS CHAPTER 2 affairs of the partnership (s. 10). The limited partner may also from time to time investigate the state and progress of the limited partnership business and advise as to its management and act as a contractor, agent or employee of the limited partnership or the general partner (s. 12(2)). While a limited partner may give advice from time to time as to the management of the limited partnership, if a limited partner takes part in the control of the business, that limited partner loses his or her limited liability and becomes a general partner (s. 13). A limited partner will also lose limited liability with respect to any creditor if that limited partner permits a distinctive part of his or her name to appear in the firm name of the limited partnership and the creditor has no actual knowledge that the limited partner is not a general partner (s. 6(2)). Section 8 of the Limited Partnerships Act provides some protection to limited partners by restricting general partners from doing certain acts except with the written consent to, or ratification of, the specific act by all limited partners. A limited partner s interest is assignable. The assignee may become a substituted limited partner if all the partners, except the assignor, consent in writing, or if the limited partnership agreement so provides (ss. 18(1) and 18(4)). An assignee who is entitled to become a substituted limited partner becomes so when the declaration is amended to so indicate (s. 18(5)). A substituted limited partner has all the rights and powers of the limited partner who assigned his interest, and is subject to all the restrictions and liabilities of his assignor. This excludes any liability of which the substituted limited partner did not have notice at the time he or she became a limited partner and that could not be ascertained from the limited partnership agreement, the declaration or the record of limited partners (s. 18(6)). An assignee who is not a substituted limited partner has no right to inspect the limited partnership books or to be given any information about the limited partnership or its affairs. Such an assignee is entitled only to receive the share of profits or other compensation by way of income and the return of the contribution to which the assignor would have been entitled (s. 18(3)). A general partner has all the rights and powers and is subject to all the restrictions and liabilities of a partner in a partnership without limited partners. General partners in a limited partnership require the consent or ratification of all limited partners for actions that fall within the categories listed in s. 8 of the Limited Partnerships Act, and this list may be augmented in a limited partnership agreement. A person who is both a general partner and a limited partner in the same limited partnership has the rights and powers, and is subject to the restrictions and liabilities of a general partner. However, in respect of the person s contribution as a limited partner, the person has the same rights against the other partners as a limited partner (s. 5(2)). A general partner s liability can only be unlimited, and becoming a limited partner has no effect on this liability. A general partner may nevertheless want to be a limited partner in order to participate with the limited partners in distributions of any profits. 2.3 Dissolution of a limited partnership Section 21 of the Limited Partnerships Act provides that a limited partnership is dissolved if a general partner dies; retires; or becomes mentally incompetent; or, in the case of a corporate general partner, is dissolved. This provision can be displaced by a provision in the partnership agreement allowing the general partners to continue the business of the limited partnership if all the remaining partners, general and limited, consent to the continuance. The provisions of the Partnerships Act regarding dissolution also apply to a limited partnership. A limited partner is given the same right as a general partner to obtain dissolution of the limited partnership by court order. In addition, a limited partner is entitled to have the limited partnership dissolved and its affairs wound up where: the limited partner is entitled to have his contribution returned but, upon demand, it is not returned; or the limited partner is not entitled to the return of his or her contribution because the liabilities of the limited partnership have not been paid or there are not sufficient limited LAW SOCIETY OF UPPER CANADA: NOT TO BE USED OR REPRODUCED WITHOUT PERMISSION 15

6 CHAPTER 2 BUSINESS LAW partnership assets out of which to pay them (s. 15(4)). Upon the dissolution of a limited partnership, the liabilities of creditors are paid first. Then, unless the partners have otherwise agreed, payments are made in the following order (s. 24): to limited partners in respect of their profits and other compensation; to limited partners in respect of their contributions; to general partners other than for capital and profits; to general partners in respect of their profits; and to general partners in respect of capital. A declaration of dissolution must be filed with the Registrar of Partnerships when all the limited partners cease to be limited partners (s. 23). 2.4 Extra-provincial limited partnerships In the absence of legislation respecting the status of a limited partnership organized in one province and carrying on business in another province, it is unclear whether the limited partners retain their limited liability in the latter province. This matter is dealt with in the Limited Partnerships Act, which provides that no extra-provincial limited partnership shall carry on business in Ontario unless it has filed a declaration with the Registrar of Partnerships together with a power of attorney appointing an attorney in Ontario (s. 25). The power of attorney ensures that there is someone in Ontario who may be served if a person in Ontario wishes to bring an action against the extraprovincial limited partnership. Until a declaration and a power of attorney are filed, the extraprovincial limited partnership is incapable of maintaining an action or other proceeding in any court in Ontario. A limited partner of an extraprovincial limited partnership is not liable in Ontario as a general partner by reason only that the limited partnership carries on business in Ontario without filing the required declaration and power of attorney. Furthermore, it is the laws of the jurisdiction under which an extra-provincial limited partnership is organized that govern its organization and internal affairs and the limited liability of its limited partners (s. 27). All provinces other than Manitoba and Quebec presently have partnership legislation that provide that if an extra-provincial limited partnership is registered in the province, the limited partners continue to enjoy limited liability. In Manitoba and Quebec, it is unclear whether or not limited partners in an Ontario limited partnership that conducts business in such a province will retain their limited liability. 2.5 Limited partnership agreements A written limited partnership agreement is normally advisable to deal with matters not addressed in either the Partnerships Act or the Limited Partnerships Act or with matters provided for in these statutes, which the partners desire to alter by agreement. With a carefully drawn agreement, it is possible to structure a limited partnership to achieve flexibility similar to that provided by a corporation, with provisions for the transferability of partnership interests or units and the admission of new limited partners. A limited partnership with a minimally capitalized corporation as its only general partner can provide to all its participants the protection of limited liability offered by incorporation, if the corporation, and thus the limited partnership, is managed by persons who are not limited partners. It has been held that if an individual who is a limited partner is also a director, officer or employee of the corporate general partner and takes part in the control of the business of the limited partnership, that limited partner loses his or her limited liability. 2.6 Taxation of partnerships In the case of a general partnership or a limited partnership, the income or loss of the business carried on by the partnership is determined at the partnership level and then allocated to the partners. The partnership itself is not a taxable entity. Expenses, capital cost allowance (CCA) and other deductions generally are deductions in computing the income of the partnership to determine the partnership s net income or loss. That income or loss is divided among the partners, 16 LAW SOCIETY OF UPPER CANADA: NOT TO BE USED OR REPRODUCED WITHOUT PERMISSION

7 PARTNERSHIPS CHAPTER 2 and each partner s share of that income or loss is included in computing that partner s income for tax purposes. Various sources of income and loss (such as capital gains, interest or incentive deductions, etc.) flow through a partnership to the partners and retain their characteristics as to source and nature. For example, a taxpayer s property income can be offset by partnership property losses. If the partner is an individual, he or she is subject to tax at the marginal tax rates applicable to individuals under the Income Tax Act. Like a sole proprietor, a partner must aggregate his or her share of the partnership s net income or loss with his or her income or losses from all other sources. A corporate partner will similarly be subject to tax on its share of partnership income at the applicable corporate tax rates. Although a partnership does not file an income tax return, it files an Information Return with the Canada Revenue Agency (CRA) and is also required to provide a copy of this Information Return to each partner. This Information Return shows, among other things, the names of the partners and their share of each source of partnership income or loss. 3. Limited liability partnerships A limited liability partnership (LLP) is essentially a cross between a general partnership and a limited partnership. Similar to a general partnership and a limited partnership, the assets of an LLP can be looked to in order to satisfy the debts of, and claims against, the LLP. In contrast to a general partnership, a judgment against an LLP for negligence will not be enforceable against the personal assets of all the partners (Partnerships Act, s. 10(2)). Only the partner who is negligent or who was negligent in supervising or controlling the employee who was negligent will have his or her personal assets exposed if the claim is successful (s. 10(3)). The Partnerships Act specifically provides that a partner in an LLP is not a proper party to a proceeding by or against the LLP for the purpose of recovering damages or enforcing obligations arising out of the acts or omissions of the negligent partner (s. 10(4)). In contrast to a limited partnership, a judgment based on a contract entered into by the LLP will be enforceable against both the assets of the LLP and the personal assets of the partners. An LLP may only carry on business in Ontario for the purpose of practicing a profession governed by an Act, and provided the following conditions are met: the Act must expressly permit the LLP to practise the profession (currently, only lawyers and chartered accountants are permitted); the governing body of the profession requires the LLP to maintain a minimum amount of liability insurance; the LLP must register its firm name under the Business Names Act (s. 44.3(1)); and the firm name must contain the words limited liability partnership or société à responsabilité limitée or the abbreviations LLP, L.L.P. or s.r.l. (s. 44.3(3)). The Law Society Act permits lawyers in Ontario to form and practise within LLPs (s ). The minimum insurance requirements for each partner, currently $1,000,000, are set out in By- Law 7 to the Law Society Act. Pursuant to By-Law 7.2(1), law firms that change from general partnerships to LLPs must disclose the nature of the limited liability of the partners to all persons who are clients of the firm when the change in practice structure occurs. Chartered accountants constitute a further example of a profession whose members are permitted to practise as LLPs. 4. Partnership agreements At a minimum, and to avoid the default provisions of the Partnerships Act, a well-drafted partnership agreement should address the following issues. 4.1 Scope of the business The business of the partnership should be carefully defined in order to limit the liability of the partners and to encompass all of the activities of the partnership. 4.2 The firm name Once the name has been chosen, it may acquire a goodwill of its own, which may make it undesirable LAW SOCIETY OF UPPER CANADA: NOT TO BE USED OR REPRODUCED WITHOUT PERMISSION 17

8 CHAPTER 2 BUSINESS LAW to change. Therefore, the partnership agreement should contemplate whether the firm name would change upon the withdrawal, death or retirement of a partner. 4.3 Restrictions on carrying on a competing business While s. 30 of the Partnerships Act addresses the issue of a partner competing with the firm while still a partner, partners may wish to include a restrictive covenant in the partnership agreement limiting a departing partner s ability to carry on a competing business. Care should be taken to ensure that any such covenant is enforceable. The test is whether the restraint is reasonable in area and time, is not contrary to the public interest, and is no more restrictive than necessary to protect the business interests of the persons in whose favour it runs. 4.4 Requirements for the admission of new partners Absent a partnership agreement, the rules set out in s. 24 of the Partnerships Act will govern the admission of new partners. Of note, rule 7 provides that [n]o person may be introduced as a partner without the consent of all existing partners. The partnership may wish to impose substantive requirements before a person may be considered for admission, such as five years professional experience; procedures for admission (for example, approval by at least 75% of the partners); and requirements on admission including capital contributions. 4.5 Tax treatment of partnership income Of great importance to the prospective partner is the treatment of partnership income under the Income Tax Act. So long as a worker is in receipt of salary or wages from employment, income is computed on a calendar year basis and deductions are limited to those specifically set out in s. 8 of the Income Tax Act. Employment is defined in s. 248(1) of the Income Tax Act to mean the position of an individual in the service of some other person. As a general partner is normally held to be incapable of being in his or her own service, the remuneration received by a partner will not be treated as employment income. The result is that many more deductions are available to a partner. In the past, several large professional firms have structured their compensation arrangements so that relatively junior members can be treated as partners for tax purposes but not for decisionmaking purposes. Care must be taken to ensure that the arrangement will still be characterized as a partnership for income tax purposes. Normally, the general partners do not want to split profits with a junior partner to any significant extent, but realize that a junior partner must have a base salary. The solution is the payment of a predetermined salary plus a minuscule percentage of profits. Normally, where a salary is paid to another in addition to a share of profits, it is strong evidence that the relation between the two is that of master and servant rather than that of partners. However, case law has accepted that a partner, for tax purposes, may be paid a flat salary and not be responsible for losses. 4.6 Management The default rule contained in s. 24 of the Partnerships Act focuses on the numerical majority of the partners involved. This is normally modified in the partnership agreement to reflect the economic interests of the partners where levels of participation or economic interest are not equal. In partnerships involving a large number of participants, management is often done by a committee appointed by the majority of the partners in economic interest. 4.7 Capital contributions Normally, the new partner will make a capital contribution, which may increase the firm s capital or, more likely, be used to pay back some of the capital contributions or entitlements of existing partners. Capital contributions are commonly made in the same ratio as income distributions, i.e., a partner who receives 5% of the profits must contribute 5% of the equity capital. If a partner contributes assets other than cash to the partnership (for example, real property, machinery, equipment, goodwill), the tax 18 LAW SOCIETY OF UPPER CANADA: NOT TO BE USED OR REPRODUCED WITHOUT PERMISSION

9 PARTNERSHIPS CHAPTER 2 consequences of such contributions should be considered. 4.8 Retirement and dissolution Subsection 33(1) of the Partnerships Act provides that, subject to any agreement among the partners, the partnership is dissolved by the death or insolvency of any partner. This is a particularly unfortunate rule, as it is usually not desirable from the point of view of the partners who are still alive and solvent. While provision must be made for what happens on the death or insolvency of a partner, a successful ongoing business should not automatically terminate. Virtually all properly drafted partnership agreements deal with the question of automatic termination, normally by providing that the partnership shall not be dissolved by the death, retirement or bankruptcy of any partner or by the admission of a new partner or partners. Similarly, as a result of s. 26 of the Partnerships Act, a specific provision is normally included to say that no partner may dissolve the partnership by notice to the other partners. If the partnership is not to be dissolved, there must be some formula for the remaining partners to compensate a withdrawing partner, whether such withdrawal is caused by death or retirement. At the very least, the withdrawing partner will expect to be repaid his or her capital contribution. In many partnership agreements, a withdrawing partner is also entitled to be paid for his or her share of the goodwill or work-in-progress and may also be entitled to share in any increase in value of the basic assets of the organization. Furthermore, in the case of death, remaining partners may wish to address provision for the deceased partner s family. Retirement is a particularly difficult problem. Partners may wish to consider mandatory retirement provisions; any ongoing annual remuneration for retiring partners; a retirement allowance or lump-sum payment and the corresponding impact on partnership profits or assets; mandatory registered retirement savings plan; and the return of capital contribution. In addition, for partners who have practised for many years with the firm, some formula for a lifetime retirement pension may be appropriate. The income tax consequences of retirement payments must be considered. 4.9 Splitting of profits The Partnerships Act provides that in the absence of any agreement to the contrary, all partners are entitled to share equally in the profits. In the usual case, the partners readily agree to the initial division when the partnership is formed. But how that division should change as the workload of the individual partners changes and as the partnership income changes should also be addressed. The lawyer drafting the partnership agreement should ask the client which factors are important in determining changes in the profit split. From these factors one can prepare a list of parameters to consider. Those parameters can then be ranked in order of importance; it may be possible to agree on a method of weighting each factor Work in progress Every law firm has on its books, a sizeable quantity of docketed hours that have not yet been billed. The partnership agreement should address whether a new partner entering the firm will be required to pay for a share of the work-in-progress proportionate to the share of the profits he or she will enjoy. If no charge will be made for the workin-progress; the new partner should not receive a windfall and should not participate in the work-inprogress on the books at the time he or she enters. LAW SOCIETY OF UPPER CANADA: NOT TO BE USED OR REPRODUCED WITHOUT PERMISSION 19

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