Do you need a partnership agreement in BC? What the Partnership Act decides if you don't

If you share the profits of a business with someone, BC law may already treat the two of you as partners, whether or not you signed anything. Where there is no written agreement, the Partnership Act supplies the terms of your deal.

Those default terms were written for no business in particular. This article goes through the rules that apply automatically, where they tend to clash with what partners actually agreed over coffee, and what a written agreement usually puts in their place.

The Act fills in whatever you leave out

Section 2 of the Partnership Act defines a partnership as the relation between persons carrying on business in common with a view of profit. If that describes your arrangement, the Act's rules on the relations between partners apply to you. Most of those rules give way to what the partners agree. Section 27, which holds the core defaults, applies subject to any agreement, express or implied, and section 21 lets partners vary their rights and duties by the consent of all of them, either expressly or by a course of dealing.

Without a document, though, any variation has to be proved from emails, bank records and years of conduct, which is what partners argue about when things sour. If you are still choosing between a partnership and a company, see our article on going into business with a partner in BC. Here we assume you are already partners.

Money: equal shares unless you say otherwise

• Equal profits, equal losses. All partners share equally in the capital and profits and contribute equally to losses (s 27(a)). It does not matter who put in more money or works more hours.
• No pay for the work. A partner is not entitled to remuneration for acting in the business (s 27(f)). A partner working full time and one who is mostly passive take the same share.
• Capital and advances. A partner is not entitled to interest on capital before profits are ascertained (s 27(d)), but a payment or advance beyond the capital a partner agreed to put in earns interest at a fair rate (s 27(c)).
• Indemnity. The firm must indemnify a partner for payments made and personal liabilities incurred in the ordinary and proper conduct of the business (s 27(b)).

An agreement normally records each partner's contribution and percentage, pay or draws for working partners, how losses are shared and how much profit is paid out.

Decisions, authority and records

• Everyone manages. Every partner may take part in managing the business (s 27(e)).
• Majority for ordinary matters, unanimity for big ones. Ordinary differences may be decided by a majority, but no change in the nature of the business can be made without the consent of all partners (s 27(h)). In a two-person partnership a majority means both of you, so a disagreement has no built-in tie-breaker.
• No new partner without everyone. A person cannot be introduced as a partner without the consent of all existing partners (s 27(g)).
• Each partner can bind the firm. A partner is an agent of the firm for the purpose of its business, and acts done in the usual way of that business bind the firm and the other partners unless the partner had no authority for that matter and the other party either knew it or did not know or believe the person was a partner (s 7). Partners are jointly liable for the firm's debts (s 11).
• Open books. The books are kept at the place of business, and every partner may inspect and copy them (s 27(i)).

An agreement usually sets signing authority and spending limits, lists decisions that need everyone's consent, and gives you a way through deadlock. Section 27(j) lets a partner refer a difference about the interpretation or application of the partnership agreement to arbitration, but that presupposes there is an agreement to interpret.

Duties partners owe each other

The Act imposes duties that apply with or without a document. A partner must act with the utmost fairness and good faith towards the other partners (s 22) and render true accounts and full information about the partnership (s 31). A partner who takes a benefit from a partnership transaction, or from using the partnership's property, name or business connections, without the others' consent must account for it (s 32). A partner who runs a competing business of the same nature without consent must pay the profits over to the firm (s 33).

An agreement can make these duties concrete: what counts as competing, which outside activities are allowed, and what restrictions apply after a partner leaves.

When a partner leaves, dies or wants out

• Exit by notice. If no fixed term was agreed, any partner may end the partnership at any time by giving notice to the others (ss 29(1) and 35(1)(c)). It is dissolved from the date in the notice or, if none is given, from when the notice is communicated (s 35(2)).
• Death or bankruptcy. In a two-partner firm, the death, bankruptcy or dissolution of a partner dissolves the partnership (s 36(1)(a)). With more than two partners, subject to agreement, it is dissolved as between that partner and the others.
• No expulsion without a clause. A majority cannot expel a partner unless an express agreement gives that power and it is used in good faith (s 28).
• Selling a share. A person who takes an assignment of a partner's share gets only the profit share, with no say in management while the partnership continues (s 34(1)).
• Court dissolution. A partner can ask the court to dissolve the partnership in listed situations, including persistent breach of the agreement, a business that can only be carried on at a loss, or where it is just and equitable (s 38).

On dissolution, partnership property first pays the firm's debts, with any surplus going to the partners (s 42), and s 47 sets the order for settling accounts unless otherwise agreed. If the remaining partners keep running the business with an outgoing partner's share and no final settlement, the outgoing partner or their estate can, absent agreement, choose a share of the profits attributable to that share or interest at a fair rate (s 45(1)); a properly exercised purchase option in the agreement ends that entitlement (s 45(2)).

So without an agreement, one partner's notice can dissolve the partnership, and nobody has a right to buy the other out at an agreed price. An agreement usually sets notice periods, buy-sell rights, a valuation method and payment terms, and covers death, incapacity, bankruptcy and separation. See our article on buying out a business partner.

A checklist of defaults to override in writing

• Percentages for profit, loss and capital, and when profits are distributed.
• Salary or draws for partners who work in the business.
• Signing authority, spending limits, unanimous-consent decisions and a deadlock process.
• Rules for admitting new partners.
• Exit terms: notice period, buy-sell rights, valuation and payment.
• Death, incapacity and bankruptcy, and whether the business continues.
• Competition, confidentiality and non-solicitation.
• Dispute resolution, including mediation or arbitration.

Registration is separate: partnerships in trading, manufacturing or mining must file a registration statement (s 81). If you later incorporate, the company will need its own documents, usually a shareholders' agreement.

Already in business with a partner? Put the deal you actually have in writing

Our business lawyers can review how your partnership operates today, explain which Partnership Act defaults apply to you, and draft a partnership agreement that reflects the terms you and your partner have agreed.

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