Going into business with a partner in BC: partnership or company?

Two people with a business idea often start working together long before they talk to a lawyer. In BC, that can mean a partnership already exists, with legal consequences neither of them chose.

This guide explains how the Partnership Act treats co-owners, why a company changes your personal exposure, and the questions to settle with your business partner before customers, contracts and money start arriving.

You may already be in a partnership

Under BC's Partnership Act, a partnership is simply "the relation which subsists between persons carrying on business in common with a view of profit." No agreement, registration or bank account is needed for one to exist. If you and a friend start selling products, taking on clients or signing a lease together and splitting what is left over, the law may already treat you as partners.

The Act sets out rules for deciding whether a partnership exists. Owning property together does not by itself create one, and neither does sharing gross revenue. But receiving a share of the profits of a business is evidence that you are a partner unless there is evidence to the contrary. That is why the question "are we partners?" is often answered by what you actually did, not what you intended.

What being a partner means for your personal risk

The biggest difference between a general partnership and a company is liability. In a general partnership, the business has no separate legal existence from the people in it.

• Each partner can bind the firm. The Act makes every partner an agent of the firm and of the other partners for partnership business. If your partner signs a supply contract or orders equipment in the usual course of the business, you are generally bound, even if you did not know about it.
• Partners share the firm's debts. Each partner is liable jointly with the others for the firm's debts and obligations incurred while they are a partner. If the business cannot pay, creditors can look to the partners' personal assets.
• Mistakes by one partner can become everyone's problem. If a partner's wrongful act or omission in the ordinary course of business causes loss to someone outside the firm, the firm is liable to the same extent as that partner.
• Holding yourself out counts. Someone who represents themselves as a partner, or knowingly lets others do so, can be liable as a partner to anyone who gave credit on the strength of that representation.

The default rules if you have no partnership agreement

When partners have not agreed otherwise, the Partnership Act fills the gaps. Some of these defaults surprise people:

• All partners share equally in capital and profits and contribute equally to losses, regardless of who put in more money or time.
• Every partner may take part in managing the business, and no partner is entitled to a salary for doing so.
• No new partner can be brought in without the consent of all existing partners, and the nature of the business cannot be changed without everyone's consent.
• A majority cannot expel a partner unless an express agreement gives that power.
• If no fixed term was agreed, any partner can end the partnership by giving notice to the others. In a two-person partnership, the death or bankruptcy of a partner dissolves it.

These rules can be changed by agreement, and the Act recognises that partners' rights can be varied by the consent of all of them. A written partnership agreement is how you set your own rules on contributions, profit splits, decision-making, exits and what happens if someone dies or wants out.

Do you have to register a partnership in BC?

Persons associated in partnership for trading, manufacturing or mining purposes must file a registration statement with the registrar, and the Act requires it to be filed within three months after the firm is formed. The statement names the firm, describes the general nature of the business and lists the partners. Partners trading under their own personal names do not need to request a business name, but the Province notes that a sole proprietorship or partnership name has no name protection.

Registration is an administrative step. It does not create a separate legal entity and does not limit anyone's liability.

How a company changes the picture

A company incorporated under BC's Business Corporations Act has the capacity and the rights, powers and privileges of an individual of full capacity. It signs contracts, owns assets and owes its own debts. The Act provides that no shareholder is personally liable for the company's debts, obligations, defaults or acts, other than in limited cases set out in the Act, and a shareholder's exposure on their shares is generally limited to any unpaid amount for them.

That protection has practical limits. Banks and landlords often ask owners of a new company for personal guarantees, and directors can have personal exposure for some obligations. Our article on director personal liability in BC explains where that risk sits.

A company also comes with more formality: articles, a minute book, annual reports and resolutions for key decisions. Co-owners still need to agree how the company will be run, which is the job of a shareholders' agreement.

Questions to answer before you choose

• How much personal risk will the business carry from leases, loans, customers or employees?
• Who is contributing cash, equipment, ideas or unpaid time, and how should that be reflected?
• Who can sign contracts or spend money without the other's approval?
• What happens if one of you wants to leave, cannot work, separates from a spouse or dies?
• Is there tax or accounting advice you need before deciding? An accountant can model the tax side alongside the legal structure.

If you are weighing incorporation, our article on when incorporating in BC makes sense covers the trade-offs in more detail.

Starting a business with someone? Set the rules before the money arrives

Our business lawyers can help you compare a partnership and a company for your plans, incorporate a BC company, register a partnership, and prepare a partnership or shareholders' agreement that sets out how decisions, contributions and exits will work.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.