You and another individual have come together to form a business partnership. You have each brought your own property and assets into the partnership to help build and grow the business. Now, a dispute has arisen and you are looking to dissolve the partnership. What happens to all of that property you each brought into the partnership? Do you each take out what you brought in? Or does all of that property become divisible between the partners? The law provides some answers to these questions, although they may not be what you’re looking for as the registered owner of the property.
The first issue to address is when property becomes partnership property. All property that is brought into a partnership or is acquired through the partnership for the purpose of the business is considered partnership property. Unless there are terms in a partnership agreement to the contrary, when property becomes partnership property, a partner loses their individual beneficial interest and interests in the property instead belong to the partnership (Partnerships Act, R.S.O. 1990, c. P.5, s.21(1)).
If property has become partnership property, you may be asking yourself how it belongs to the partnership if it is held in only one partner’s name. A business partnership is not a legal entity, nor does it have a legal personality, therefore the business partnership is incapable of holding property. Partnership property is held in trust by the owning partner for the benefit of the partnership, and, as a result, for the other partner(s).
If the property is being held in trust for the partnership, how is the property to be divided upon dissolution? Partnership property is not divisible in specie between the partners, meaning the property cannot be divided in its actual form, without liquidating the property (Porter v. Armstrong, [1926] S.C.R. 328, 2 D.L.R. 340 [Porter]). Upon the dissolution of a partnership, the assets can be liquidated and divided amongst the partners, once all of the partnership’s liabilities have been satisfied (Partnerships Act, R.S.O. 1990, c. P.5, s.39). However, where it is not practical to liquidate the property, the Court can order that the property be valued, the value divided by the partners, and the partner that is retaining the property pay to the other partner the value they are entitled to (Porter).
When bringing property into a business partnership, it is important to consider the possible implications that this may have on the property and your, and your partner’s, right to the property upon a dissolution of the partnership. Whether your intention or not, the property may become partnership property of which your business partner becomes entitled to a portion. However, this information is contingent upon the existence of a partnership agreement to the contrary.
More information? We’re here to help – [email protected] This WARDS LAWYERS PC publication is for general information only. It is not legal advice, nor is it intended to be. Specific or more information may be necessary before advice could be provided for your particular circumstances.
