Partnerships

Partnerships are one type of business structure, and are different from corporations and sole proprietorships.

If two or more people form a business and start operating without having taken any steps to form an incorporation, whether or not they know it, they have formed a “partnership”.   While the sole proprietorship is the default business structure for an unincorporated individual, a partnership is the default business structure when more than one person work together with the intention of earning profit from a business.

Sharing many of the same characteristics of the sole proprietorship, partnerships are quick to start, have a low cost to maintain, and there is no legal distinction between the business and the people behind the scene.  However, there is one certain different characteristic of partnerships which needs to be explored very carefully and of which you should be aware.  A particularly concerning pitfall is that each partner may bind the business.  That is to say that each partner may buy, hire, and perform transactions on behalf of the business.  And if the partnership cannot satisfy the liabilities, the partners will find that they are jointly and severally liable for debts incurred by the business. This means that a creditor can sue all the various different partners in the business in order to recover amounts that are owed to them.

Another matter of concern is that unless there is a partnership agreement which provides otherwise, a general partnership between two parties ends when one of the partners dies or otherwise leaves the business.  Similarly, without an agreement that provides otherwise, when there are more than two partners, the death of one partner does not necessarily end the partnership, but it can leave the deceased partner without an interest to pass on to a surviving spouse.

Limited Partnerships

Limited partnerships (“LP”s) are almost identical to general partnerships except that with limited partnerships there is one “general partner” responsible for the liabilities of the LP, and one or more “limited partners” with limited liability and limited control and decision-making capabilities. Unlike general partnerships, an LP requires formal registration.

Taxation of Partnerships

Since a partnership is not a legal entity, similar to the taxation of sole proprietorships, each partner will declare its own share of its income on their own T1 return if the partner is an individual or on their own T2 return if the partner is a corporation.  So in essence all the downfalls of the taxation of sole proprietorships is carried over to partnership for any partner who is operating as an individual.

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