It’s important when you’re running a company to be ready for anything. It’s not uncommon for people to have backup plans for their backup plans, and it’s often understood that nothing is ever completely set in stone. Of course, there are many things that you can’t prepare for, but there are also many things that you can. If you’re running a company with someone else, you need to be prepared for what will happen and what you need to do if a partner leaves the company.
Reasons for Leaving
There are a multitude of reasons for why a partner may leave a company. However, most separations can be put into two categories: contested separations and uncontested separations. An uncontested separation usually refers to one in which the separation is amicable, and everyone is in agreement. This can mean that one of the partners is retiring, or has faced something in their life which will render them unable to continue to work such as disability, or some other circumstance in which both the separating partner and the remaining partner(s) agree that it is best for the partner to leave. This also applies to the death of the separating partner.
A contested separation refers to any instance where the partner(s) vote to remove a partner who does not want to separate voluntarily. Usually in these cases, the separating partner has violated a part of the partnership agreement, warranting their removal.
Agreements
When starting a business, it is incredibly important to have a partnership agreement that covers all aspects of the business. This usually covers things like not only conduct, but also which parts of the business are covered by each person, and an understanding of how the business will be impacted, should the partnership be dissolved.
These kinds of agreements usually define how the business will continue without one of the partners, including responsibility for finances, and an outline on who within the partnership would assume assets and liabilities.
In Canada, when a business separation occurs, partners are required to fill out a separation agreement, also known as a notice of withdrawal. This will cover everything that the partner will need to be removed from, such as the name and any accounts they may be in charge of, and how the business will be structured after a partner leaves.
If a withdrawal is not specified in the partnership agreement, then the partners still involved in the business will be bound to the Partnership Act, and will be required to dissolve the partnership. In this case, the partners will be required to pay their debts, observe any losses, liquidate their assets, and any surplus is divided among the partners. In this specific instance, in order for the remaining partners to continue the business, a new general partnership would need to be created.
Laws and Regulations
This, of course, brings us to any laws and regulations that need to be followed. As a general rule, each of Canada’s provinces and territories have their own Partnership Act. This means that laws and regulations will vary based on the region in which your business is registered to, and it is important to pay close attention to those laws, as they can vary. However, as stated above, the default under most laws nationally, is that the partnership must dissolve if a partner leaves for any reason.
In Canada, if your partnership agreement permits the withdrawal of a partner, this may mean needing to change the name of the registered operating name of the business if the name includes the separating partner’s legal name. Additionally, the name may need to be changed if the business is using a provincially registered operating name. You also may be required to register your business as a new legal entity, thus also requiring a new business number and CRA program accounts. Typically, businesses will be required to review any tax and program-specific requirements that they may need to change or update, and there will need to be a review of entitlement to everyone’s share of the partnership’s assets.
Lauren Schwartz | Staff Writer
