Ontario's Business Structures- which one is right for you? Part 2 - Partnerships.
This week, we will be discussing another business structure known as Partnerships.
As the name suggests, a Partnership is created when two or more individuals carry on a business with a view to making profit. Partnerships are within the exclusive jurisdiction of each province. In Ontario partnerships are governed by the Partnership Act. In a partnership, the partners pool resources together and jointly own the business assets. They also share the liability of the partnership jointly.
Generally, a partnership can take one of three forms:
Under a General Partnership, all the partners are involved in the management of the business. They are also jointly responsible for any liability that accrues to the business and are bound by acts and obligations taken by one another.
A Limited Partnership is a combination of both General Partners and Limited Partners. Under this Partnership type, the Limited Partners are not involved in the management of the business, rather the General Partner is responsible for all day to day operations and decision making on the part of the partnership. The liability of the limited partners are limited to the capital that they invest into the limited partnership to operate the business. This is unlike General Partners who have unlimited liability in regard to the debts and losses incurred in the business.
Limited Liability Partnership
This is a type of Partnership that is made available to only a certain category of professionals such as lawyers, accountants and doctors. The Partnership Act of each province governs the establishment of this Partnership type and should be consulted to see whether your business type qualifies or not.
There are numerous tax implications to consider when setting up a Partnership. The profit or loss made in the business is shared according to any Partnership Agreement that is entered into at the time that the partnership is created, and then each Partner is taxed is based on his or her share.
Advantages and Disadvantages:
There are several advantages and disadvantages that a partnership offers. Some of these points are considered below:
Easy to raise capital since partners pool resources together.
Partners own the business assets jointly.
Profit made by the partnership is shared by the partners.
Partners manage the business jointly.
Business risk is shared amongst partners.
Filing tax returns is relatively simple.
Unlimited liability - Since the business and Partners are considered as one, any debt incurred can be enforced against the Partners. Note that this liability concern does not apply to Limited Partners in a limited partnership because their liability is limited to the capital invested into the business.
It may be difficult and slower to make decisions because you need buy-in from each of the partners.
Partners can legally bind other Partners by their acts.
It may be difficult to find compatible Partners.
There is a risk of conflict between Partners.
Profits which are made by the partnership are taxed at the Partner's personal income tax rate.
Succession issues - there is no automatic succession, generally once a partner dies, the business can be at an end.
Prior to deciding to establish a business as a partnership, it is vital to set out the defined roles of each Partner in a Partnership Agreement to avoid future disagreements in the business.
Stay tuned to this series as we continue to discuss the intricacies of other business structures available in Ontario.
For any questions or advice on which business structure is right for you , please don’t hesitate to contact Northview Law at 416-639-7639, or follow this link to book a free consultation.