Partnership in Canada

Partnership Definition, Types & More

Portrait of young business partners on street
A business partnership. Image (c) Ben Pipe Photography / Getty Images

Definition:

A business partnership consists of two or more legal entities pooling their resources to operate a shared business.

The "legal entities" that form the partnership may be individuals, corporations, trusts or partnerships.

The resources each partner contributes to the new business partnership don't have to be in the form of money. A partner's contribution might be something such as skills, labour or property.

And although all partners share the same risks in a business operation, they may or may not equally share the business's profits or losses; a partner's share is defined by the partnership agreement.

The amount of liability each partner has depends greatly on which kind of partnership is created.

Types of Partnership in Canada

1) Generally, when we talk about partnerships, we're talking/thinking about general partnerships. A General Partnership is defined as a business arrangement between two or more individuals who share the profits and liabilities of the business.

So in a general partnership, each partner is fully personally liable for the debts, contractual obligations and torts resulting from the partnership's operation, just as in a sole proprietorship. If you are a partner in a general partnership, you could be personally sued for something that happened as a result of carrying on business.

However, General Partnerships are not the only types of partnership arrangements that can be formed. In Canada, there are two other types of partnership:

2) Limited Partnership - A partnership consisting of one or more general partners, who have unlimited liability, and one or more limited partners, who have limited liability depending upon their contribution to the partnership.

For liability reasons, limited partnerships are often set up with a corporation as the general partner and two or more individuals as limited partners.

The limited partner(s) contribute financially but is not otherwise involved in the business. If a limited partner does become involved in operating the business, he or she will lose their "limited" liability status and become just as liable as a general partner.

Limited partnerships are often used as a way to raise money by businesses.

3) Limited Liability Partnership – In Canada, a limited liability partnership is only available in some provinces and often only available to groups of professionals, such as lawyers, accountants and doctors. For instance, currently in Ontario, only lawyers, chartered accountants and certified general accountants may form a Limited Liability Partnership.These partnership agreements are governed by specific provincial legislation.

A limited liability partnership, as the name implies, gives the partners more liability protection than they would have as general partners. If, for example, a client feels wronged or injured and wants to sue, she can sue the partnership and only the assets of the partner who worked with or on that client will be at risk, not the assets of all the partners as would be the case if they were all general partners.

The Tax Treatment of Canadian Partnerships

Tax-wise, partnerships are treated like sole proprietorships; each partner reports income and pays income tax on his or her personal income tax return. (Here's How to Complete Your T1 Canadian Income Tax Form.)

Choose Your Form of Business Ownership Carefully

While you're not wedded to one form of business ownership for the entire life of your new business, it can be cumbersome and expensive to close down one form of business and start another. Different business structures have different advantages and disadvantages, and it's certainly best if you choose the one best suited to your future plans and current tax circumstances in the first place.

If starting a partnership is your choice, no matter what kind of partnership you are thinking of entering, a written partnership agreement is a must.

Here are the 10 Questions Good Partnership Agreements Need to Answer.