Business Law

My friend and I have an idea for a business and we are considering forming a partnership. How does a partnership work and how should one be setup?

Whether or not a partnership exists is a fundamentally a legal question. Ontario’s Partnerships Act says that a relationship between “persons carrying on a business in common with a view to profit” is a partnership within the meaning of the Act. This is important because it means that whether or not you declare yourself to be a partnership, legally speaking, you might be a partnership anyways, whether you intended to or not.

A partnership can exist between you and your friend personally, or even as between two corporations controlled by each of you. Unlike a corporation, however, a partnership has no separate legal existence from the partners themselves and each partner has the power to bind the partnership and each partner is jointly liable for any obligations incurred on behalf of the firm. This is why, when deciding to form a partnership, a partnership agreement can be very practical.

A partnership agreement sets out the rights and obligations for partners in the partnership and provides for what should happen in circumstances of partnership incapacity, retirement or death. Without one, the Partnerships Act will provide for what happens to the partnership in these circumstances, often with unintended results. A partnership agreement can also provide mechanisms for the distribution of partnership income and a process for bringing additional persons into the partnership. Creating a partnership agreement that meets your goals with the help of a commercial Lawyer ensures that your partnership will continue in a manner of your design.

I run a small business and I have several small contracts that I am currently in the process of negotiating. Are these worth bringing to a Lawyer for review?

‍Depending on the type of contract, there are a number of areas a Lawyer’s expertise can provide guidance, including contracts relating to employment or contractor relationships, borrowing and secured transactions, equipment leases, and other commercial agreements. Simply because a document is short, this does not mean there aren’t important clauses or terms that require careful consideration.

Contracts often contain important clauses relating to the limitation of liability, indemnification, and the waiver of important legal rights. Such clauses can have legal and financial implications for you or your business down the road. Understanding these implications is crucial and one of the services a Lawyer can provide.

A Lawyer can meet with you for a short consultation in order to review your contractual document and answer any questions you might have. By communicating to the Lawyer your expectations of the proposed contract, a Lawyer can work with you to achieve your goals as well as highlight and help you understand risks and liabilities that you or your business may be taking on as part of the contract.

If you have some questions about a contract and feel you may benefit from meeting with a Lawyer call and ask to set up a meeting.

My husband and I are the sole shareholders and directors of an incorporated retail business. We have been quite successful and are generating cash excess to business requirements. We do not want to pay the cash out to ourselves now, and pay high rates of tax, but at the same time this cash is a significant part of a retirement fund. We have no creditors, other than trade creditors payable in the ordinary course. How do we protect this cash for our retirement?

‍You are asking a good question. In the event of an unexpected economic downturn or legal claim against your active business corporation, the excess cash generated in the business could be exposed to potential creditors. Once the liability is crystalized, it may be too late to take action that will protect the cash. You have also correctly identified that the simplest solution –payment of the cash out to yourselves – attracts undesirable tax consequences.

A cost efficient solution is the creation of a holding corporation. The holding corporation structure, when designed properly, allows excess money from your active business corporation to be paid by dividend to the holding corporation, tax free. The holding corporation is a separate legal entity, and is generally insulated from claims against your active business corporation.

Care is required that the desired tax treatment is achieved in the structuring of the holding corporation. There are other financial planning considerations, such as ensuring the availability of the lifetime capital gains exemption, which must be addressed by the new structure. This type of corporate structuring may also be implemented as part of a broader strategy for business succession and included as part of your estate planning.