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, labor, 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, losses, or liability. 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
There are three types of partnerships available to Canadian businesses.
1. General Partnership
These are the most common type of partnership. A general partnership is defined as a business arrangement between two or more individuals who share the profits and liabilities of the business.
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 happens in the business.
2. Limited Partnership
This is 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.
A limited partner (also referred to as a "silent partner") contributes financially and may occasionally provide advice, but is not otherwise involved in the business. If a limited partner does become involved in operating the business, they will lose their limited liability status and become just as liable as a general partner.
Businesses often used limited partnerships to raise money, as the limited liability will attract more investors.
3. Limited Liability Partnership (LLP)
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 wanted to sue the partnership, only the assets of the partner who worked with or on that client would be at risk. The assets of the other partners would be protected, which wouldn't be the case with a general partnership.
In most provinces, LLPs are only allowed in high-risk professional environments such as lawyers, accountants, architects, or doctors, where the daily business activities of each partner have minimal overlap.
LLPs are available in all provinces in Canada. However, LLPs are governed by provincial legislation, and the protection provided differs from province to province. Here are the links to partnership acts in each province:
- British Columbia
- New Brunswick
- Nova Scotia
- Prince Edward Island
In some provinces, such as Alberta and Manitoba, LLPs offer partial-shield protection, which limits the partners from acts of negligence, wrongful acts or omissions, malpractice, or misconduct committed by other partners during the provision of services. It does not protect against general contractual claims against the firm. It may also protect against similar wrongful acts committed by employees who are supervised by other partners.
Other provinces, such as B.C. and Ontario, provide full-shield protection, which protects the partner from all claims against the partnership, whether contractual or through the malfeasance of other partners. Partners are still liable for their own wrongful acts.
If you are at all uncertain about the protections provided by an LLP in your jurisdiction, consult with a lawyer who is familiar with business partnerships.
The Tax Treatment of Canadian Partnerships
Tax-wise, partnerships are treated like sole proprietorships. Each partner reports income and pays income tax on their personal income tax return. The partners each file their own T1 form, along with any other required forms, and report business profits or losses accordingly. Consult a tax professional to understand your tax obligations in a partnership agreement.
Choose Your Form of Business Ownership Carefully
While you're not wedded to one form of business ownership for the entire life of your 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 best to choose the one best suited to your future plans and current tax circumstances.
If starting a partnership is your choice, a written partnership agreement is a must, no matter what kind of partnership you are considering. That agreement will ensure that all partners are on the same page about the business.