RSM225

Topics: Partnership, Types of business entity, Corporation Pages: 15 (2519 words) Published: April 17, 2014
CH. 3: BUSINESS ORGANIZATIONS:
PARTNERSHIPS (GPPs, LLPs AND LPs)

Overview:

Three kinds of partnerships:

General partnership (“GPP”)
Limited liability partnership (“LLP”)
Limited partnership (“LP”)

General Partnerships (“GPP”):

(1) Description

Two or more legal entities (individuals, corporations) owning and operating a business together for profit

(2) Formation

a) Requirements:

Partnerships Act (“PAct”) says GPP arises automatically if 4 requirements met:

(i) 2 or more legal entities

Two or more individuals, corporations

(ii) carrying on an active commercial business

“active” means ongoing, not just isolated transaction(s)

“commercial” means buying and selling , not just buying to hold as an investment

jointly owning shares or property for investment income probably is not “active commercial business” unless done somewhat regularly

(iii) jointly owning and operating the same business together

more than just working together to promote each other’s goods or services e.g. Shopper’s Drug Mart and Swiss Chalet each offering discount coupons for the other’s products

more than just sharing premises or assets
e.g. several accountants sharing same office premises and photocopier/fax to reduce overhead cost

distinguished from employer/employee relationship

(iv) to make and share profits

business must be carried on to make profit

also must be sharing profits

sharing profits means sharing revenues and sharing costs (since profit = revenues minus costs)

does not have to be equal sharing, or same ratio of sharing of revenues and expenses

sharing only revenues or costs does not qualify to create GPP

b) Partnership vs. corporation:

If the above 4 requirements are met but the business has been incorporated as a corporation, then the business is a corporation, not a partnership

c) Rules under the Partnerships Act (“PAct”):

PAct says that sharing of profits is a strong indicator that there is a GPP

This can be helpful where it is not clear whether there is an active commercial business (requirement 2 above)

However, if they are only using profits:

as a way of calculating the amount of debt repayments, or
as part of the total price payable for the purchase of a business, or as a way of calculating the amount of compensation an employee or agent will be paid,

that doesn’t count unless both parties are also jointly owning and operating that business together (requirement #3 above)

d) Can the parties avoid being a GPP by agreeing they are not a GPP?

No - what parties call themselves or agree upon re: being partners (or not partners) is irrelevant to whether or not they are partners in a GPP

Only test for GPP is whether the 4 requirements above are met

e) If not GPP, then what is it?

If not a GPP (above requirements not all met), then joint or co- owners of the property/assets

Joint/co- owners are not automatically personally liable for the debts relating to the jointly owned property/assets (unlike partners of GPP – see below)

Joint/co- owners do not automatically have fiduciary duties to each other (unlike GPP – see below)

There are no “implied terms” applicable to joint/co- owners (unlike GPP – see below)

Joint/co- owners do not automatically have the ability to bind each other to contracts relating to the jointly owned property/assets (unlike GPP – see below)

f) Apparent partner (also called “partner by estoppel”):

This is a special situation where someone can become liable for certain loan debts of a GPP as if they were a partner in the GPP

They do not become a partner, but they can become personally liable for repaying a loan debt

Arises if you say you are someone else’s partner (or you knowingly allow them to say you are their partner) and a bank or other lender lends money to them believing you are their partner

You and they are each 100% personally liable for repayment of that debt...
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