How do I buy into an existing business as a partner?

Buying into a business as a partner starts with a plain question: is the business a partnership or a corporation? The answer sets the route. A partner joins a firm on terms the existing partners accept. A shareholder joins a corporation by holding its shares, and the corporation’s own rules decide how those shares are issued or transferred. This page covers the federal Canada Business Corporations Act (CBCA) and three provincial partnership Acts, each named as that province’s own. It is general information, not advice on your deal. Read the section of each Act yourself, or have a lawyer do it, before you rely on a summary.

If the business is a partnership, the other partners must agree

Ontario’s Partnerships Act sets default rules for the rights and duties of partners, “subject to any agreement express or implied between the partners” (s.24). One of those rules is that no person may be introduced as a partner without the consent of all existing partners. British Columbia’s Partnership Act (s.27(g)) uses the same words for that province, and Alberta’s Partnership Act (s.28(g)) sets the same default, subject to an agreement, express or implied, between the partners: no person may be introduced into the firm as a partner without the consent of all existing partners. Check the partnership agreement first, because it may change the default. Ask each current partner, not just the one who approached you, whether they consent.

Debts from before you joined

Ontario’s Partnerships Act (s.18(1)) says a person admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before becoming a partner. Alberta’s Partnership Act (s.20(1)) and British Columbia’s Partnership Act contain a matching provision. That protection is narrower than it sounds. The words “for anything done before” cover the past only. Except as provided in s.10(2), which limits liability for partners in a limited liability partnership, Ontario’s s.10(1) makes every partner liable jointly with the other partners for all debts and obligations of the firm incurred while that person is a partner. Outside that exception, debts and obligations the firm incurs after you join are ones you are jointly liable for.

If the business is a corporation, you buy shares

A corporation has shareholders rather than partners. Under the CBCA (s.25(1)), and subject to the articles, the by-laws, any unanimous shareholder agreement and s.28, shares may be issued to such persons, at such times and for such consideration as the directors determine. So, unless the articles, by-laws or a unanimous shareholder agreement say otherwise, new shares are issued on a decision of the directors. Section 28(1) gives existing shareholders a pre-emptive right to newly issued shares if the articles so provide, subject to the exceptions in s.28(2). Read the articles to see whether yours do. This paragraph is about the CBCA only. A corporation formed under a provincial statute follows that statute.

Buying existing shares instead

Corporations Canada describes the other route: you buy shares from an existing shareholder, according to the terms set out in the articles, and the corporation registers the transfer. The share purchase carries its own paperwork. Under the CBCA (s.146(3)), a purchaser or transferee of shares subject to a unanimous shareholder agreement is deemed to be a party to that agreement. That agreement is a separate subject. Deavo’s page on what belongs in a shareholder agreement before you buy in covers it, so this page does not repeat it.

What the Acts leave to your own agreement

The Acts set defaults and say little about the commercial terms of your entry. They do not fix what you pay or how much capital you contribute. On profit and management they set only defaults: Ontario’s s.24 rules provide that all the partners are entitled to share equally in the capital and profits of the business, and that every partner may take part in management. Those rules apply “subject to any agreement express or implied between the partners”, so a written agreement is where your own terms belong. Put them in writing before money moves, and ask whether the agreement also says what happens when a partner later leaves. If the business is a corporation, the same questions go into the share purchase agreement and any shareholder agreement. Ask a lawyer to draft or review the documents for your side, and ask an accountant how the entry will be treated for tax.

Questions to put to the seller and the other owners

• Is the business a partnership, a corporation or something else, and under which statute? Ask for the document that shows it.
• Does a partnership agreement, articles or shareholder agreement change the default admission, issue or transfer rules?
• Who must consent to your joining, and will each of them put it in writing?
• What does the firm already owe, and what is the evidence? The Acts speak to creditors’ claims on you for past acts. They do not tell you what you are paying for.
• How will the business report its income? The Canada Revenue Agency has a page on partnerships, including the T5013 partnership information return.

Deavo is not a brokerage and does not act for either side. If you are weighing a different route, such as buying out a partner or buying alongside one, the related pages below deal with those questions separately.