Question

In 2006, Sally opened a restaurant called Traders' Place in rented premises in Ottawa's booming financial district. She operated the restaurant as a sole proprietorship. By 2012, the business had grown and she determined that she needed experienced help to run the business. In November 2012, Sally approached Marty to see if he would become the manager of the Traders' Place business. He agreed and the following were the terms of his agreement with Sally. Each month, Marty was paid $1000 plus 1 percent of the total restaurant revenues for that month. Total monthly revenues, on average, were about $100 000. At the end of each complete calendar year that Marty worked, if the restaurant had made a profit for the year equal to or exceeding $200 000, Marty was entitled to receive 10 percent of the profits. Marty was responsible for managing the restaurant, including opening and closing the restaurant, hiring, firing and scheduling staff, and ordering food and paying suppliers. Sally was responsible for the financial side of the business, including budgeting, accounting and payroll, as well as marketing. In 2013, Traders' Place profits exceeded $200 000 and Marty was paid 10 percent of the profits in accordance with the agreement. What type of business organization are Marty and Sally using to conduct their business?

Answer 1

A general partnership is started when two or more people run a business together with the goal of making a profit. When Sally asked Marty to help her run the business in November 2012, I believe that she converted Traders’ Place’s business organization from a sole proprietorship to a general partnership with Marty.

There are many factors that support the fact that the Trader’s Place’s business organization is now a general partnership. Most importantly, Sally and Marty have made a partnership agreement that clearly splits the responsibilities of running the business and the sharing of profits. Marty is being paid a small wage each month and is further compensated by one and/or ten percent, based on the monthly revenues and yearly profits, respectively. As a result, it is in Marty’s best interest to ensure that his responsibilities are met in order to achieve his compensation bonuses. This fact satisfies the definition of a general partnership and a court is likely to find that the business is being carried on for Marty’s benefit and that he is a partner in the business (McInnes, 2014).

Since profit sharing is considered non-conclusive in court, there are a few other factors that need to be considered in order to be able to classify their relationship as a general partnership. It can be assumed that Sally and Marty have a business relationship that will last for an extended period of time. Marty is not merely an investor as he is opening and closing the business, hiring, firing and scheduling staff as well as ordering food and paying suppliers.

On the other hand, there are also a few factors that suggest that Sally and Marty are not carrying on a business as a partnership. The general characteristics of a general partnership states that a partner cannot be employed by the partnership, however Marty is. Sally is solely responsible for Traders’ Place’s losses as the partnership agreement doesn’t mention anything other than Marty would not earn his yearly bonus. Sally is also solely responsible for the financial side of the business including budgeting, accounting and payroll, and marketing. As a result, it can be assumed that Marty does not have any authority regarding bank accounts and cannot freely access financial information regarding the business.

There are a few non-conclusive factors that could go either way such as the fact that they do not own jointly business property because Sally rents. It is not known whether Marty considers himself a partner or if Sally refers to him as one. In the event that they both do not, the courts would consider this to be a supporting fact that they are not carrying on a general partnership and vice versa. Lastly, whether or not Marty is sufficiently compensated to reflect any residual risk that he may be found to be a partner is subjective.

In my opinion, it can be concluded that Sally and Marty have a general partnership because they have a partnership agreement, Marty’s extra compensation varies with the restaurant’s profits and they have an enduring business relationship to carry on a business together. Most importantly, their business relationship satisfies the definition of a general partnership. For these reasons, I believe that a court would decide that the legal definition of a general partnership applied to Sally and Marty’s business relationship.