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Apr

13

Dental Partnerships (Ontario) – Part 1 of 2

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Dentists as Partners

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you are a dentist and need legal advice, contact me (Michael Carabash) or David Mayzel.

Partnerships for Dentists

In this blog, I’ll continue my discussion of how dentists can go about doing business – specifically, as a partner in a partnership.

Ontario’s Partnerships Act governs general partnerships. A general partnership is the relation that subsists between persons carrying on a business in common with a view to profit. Here, the word “business” includes “every trade, occupation and profession”. You may need to consult with a lawyer to determine if you’re already involved in a partnership (without even realizing it!). In these situations, you may be subject to the Ontario’s Partnerships Act and other legislation.

Advantages

The partnership structure offers the advantage of having someone to brainstorm your cases with, share the expenses, and expand your database of clients. Partnerships typically generate a great deal more money than sole practices. Advantages include:

  • shared financial risk;
  • continuity of cash flow (e.g. when you are on vacation or ill);
  • ability to discuss all files with your partner;
  • additional sources of capital and clients;
  • broader management base;
  • division of labour;
  • ability to diversify your products / services; and
  • sharing cost of associates and support staff.

Disadvantages

The disadvantages to having a partnership include:

  • hard to find suitable partners;
  • divided authority;
  • conflicts among partners;
  • liability for partners’ actions; and
  • less freedom to choose clients.

Ease of Creation

Ontario’s Business Names Act provides that “[n]o persons associated in partnership shall carry on business or identify themselves to the public unless the firm name of the partnership is registered by all of the partners”. The name of the partnership will also need to be approved of by the Royal College of Dental Surgeons of Ontario. In addition to registering the partnership’s name in the same manner as a sole proprietorship’s, the partners will generally enter into a partnership agreement to modify the default rules prescribed by the Partnerships Act. This partnership agreement will usually outline the relationship of the partners to each other and to third parties. What is typically included in a partnership agreement is discussed in greater detail below.

Partnership Property

There is a lot of misunderstanding when it comes to partnership property (i.e. property that is created or acquired by or otherwise becomes part of the partnership). Once property is determined to be partnership property, how the partners can deal with that property is governed by the Partnerships Act, their specific partnership agreement, and any judge-made rules (i.e. common law and equity rules). The partners do not have an interest in partnership property, but rather have an interest in the partnership, which in turn owns the property. If property is acquired using partnership monies (regardless of the name in which it is acquired), it is called “partnership property” and is held in trust for the partnership (unless a contrary intention can be demonstrated through all the other partners either participating or acquiescing to that intention): Kelly v. Kelly (1912), 3 W.W.R. 799 (P.C.). In that case, a partner invested partnership funds without the other partners knowing. He took the profits personally, but the court ruled that he was accountable to his firm for those profits. Why? Even though he had made those profits through his own efforts, he had done so using partnership monies and did not have the consent of his partners. This is now codified in section 30 of the Partnerships Act.

Indeed, the partners can only use the partnership property for the purposes of the partnership and in accordance with the partnership agreement (Section 21(1) of the Partnerships Act).

Unless the contrary can be demonstrated, all partners are interested in the whole of the partnership property and no one of them has the right to take and own any part of it exclusively. More specifically, unless there is an agreement to the contrary, real estate which becomes partnership property is not held by the partners as co-owners of real estate, but is treated as between the partners (and their heirs, executors, and administrators) as personal property (Section 23 of the Partnerships Act).

Whether a property will be considered “partnership property” may require an examination of all the surrounding facts. In Kucher v. Moore, [1991] O.J. No. 1326, the Ontario Court of Justice – General Division had to determine whether a dental practice owned by partners as tenants in common was a partnership asset or was co-owned by each partner in their individual capacities outside of the partnership. Farley J. concluded that that property was a partnership asset. He reasoned that the property was purchased either directly using partnership funds or indirectly from the individual partners in their capacity as partners with the intention that the moneys be treated as partnership funds. Furthermore, the property was treated as a partnership asset on the books of the partnership and because net income from the property was reflected as those of the partnership. Farley J. also noted a lack of instructions to the lawyers to the contrary with respect to structuring the purchase and financing of the property; indeed, the partners simply accepted in the rush of things the documents the way their lawyers felt they should be prepared.

Now, just to play it safe, partners should be clear on what is and what is not partnership property. Property can still be used by a partnership and not be considered “partnership property” if all of the partners agree (hopefully in a written agreement, but it MUST be in writing if it relates to a transfer of land). Finally worth mentioning is that, if a partner gives the partnership his property, and the value of that property increases, the partner does not realize that increase in value personally: as partnership property, the increase in value is attributed to the partnership as a whole!

Partner Rights

Unless otherwise agreed upon as between the partners (e.g. through a partnership agreement), the default rights of the partners are stipulated in the Partnerships Act, as well as at common law (i.e. judge made law) or arising out of equity. The default rules under the Act give the partners an equal right to share profits, a duty to share losses, and a right to share in controlling the management and affairs of the partnership.

Matters dealt with in Partnership Agreement

1. Who the partners are.

2. The partnership name (taking into account legal limitations).

3. The term of partnership: when will it start? When, if at all, will it end?

4. Place of business.

5. Description of business.

6. Percentage or amount of capital contribution.

7. Division of net profits (will this be periodically reviewed / adjusted according to certain criteria?)

8. Accounting and other records.

9. Auditor.

10. Fiscal year.

11. Accounting principles.

12. Banking arrangements.

13. Provision as to whether partners are to devote full time and attention to the business.

14. Management.

15. Who signs partnership contracts?

16. Partners’ drawings.

17. Retirement, bankruptcy or death of a partner.

18. Restrictive covenants (non-competition and non-solicitation).

19. Sale of partnership interest by partner to another dentist.

20. Expulsion of partner.

21. Grounds for dissolution.

22. Admission of a new partner.

23. Purchase options.

24. Valuation of a partnership interest.

25. Partnership property (i.e. property registered in firm name or name of one or more partners).

26. Insurance provisions.

27. Arbitration of disputes.

28. Requirement that partners enter into marriage contracts with their spouses.

29. Registration under the Business Names Act and with the College.

30. Governing law (i.e. Ontario).

31. Enurement and binding effect.

32. No assignment.

33. Notices.

34. Counterparts.

35. Signatures.

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