Partnerships

Last Verified: 2004-07-08

Summary

WHAT IS A PARTNERSHIP?

A partnership is a business formed by two or more co-owners. Like a sole proprietorship, a partnership is easy to form. Just a simple verbal agreement is sufficient but if money and property is at stake, a formal agreement should be written. A partnership can be formed either as a general or limited partnership.

There are two types of partnerships, a general partnership and a limited partnership.

General Partnership

In a general partnership, all the partners share in gains/losses and all have unlimited liability for all partnership debts, not just some particular share. The way partnership gains/losses are divided is described in the partnership agreement.

Limited Partnership

In a limited partnership, one or more general partners has unlimited liability and runs the business for one or more limited partners who do not actively participate in the business. A limited partner's liability for business debts is limited to the amount contributed to the partnership. This form of organization is common in real estate ventures, for example.

WHAT SHOULD BE INCLUDED IN THE PARTNERSHIP AGREEMENT?

The partnership agreement should outline the following: objectives of the partnership; amount of investment of each partner; how are gains/losses divided; duties/participation of partners; provision for death, retirement, or succession; any special conditions; and dissolution of the partnership.

Note: You might want to contact a lawyer for partnership agreements, procedures, and issues.

WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP?

Advantages:

1. Easy to set up: like a proprietorship, a partnership is easy to form.

2. Low start-up costs: partnerships usually have low start-up costs.

3. Minimal registration requirements: certificate of compliance, business license, registration of business name, and GST registration.

4. Minimal government regulations: minimal government stipulations to follow.

5. Tax advantages: lower tax rate and losses may be applied against other income of partners.

6. Continuity of business: partnership will continue till one of the partners death or if one of the other partners decides to dissolve business.

7. Incorporation: not difficult to convert a partnership to a different business structure.

Disadvantages:

1. Unlimited liability: creditors can look beyond business assets to the partner's personal assets for payments.

2. Difficulty in finding partners: difficult to find a compatible partner to do business with.

3. Difficulty in obtaining start-up costs: the amount of equity that can be raised is limited to the partner's personal wealth. Due to the risk of partnership's, it is often difficult to obtain financing.

4. Employment insurance benefits: if the business does not succeed the partners are not eligible to collect employment insurance benefits.

5. Tax disadvantage: profits must be added to personal income.

6. Sharing of control/profits: partners need to compromise and agree on beneficial terms.

7. Potential of conflict: since everything is shared great potential for conflict.

8. Termination of business: legal life of business terminates with death of partner unless partnership agreement states otherwise and the partners decide to continue the partnership.

HOW DOES A PARTNERSHIP PAY TAXES?

A partnership by itself does not pay income tax on its operating profits and does not have to file an annual return. Instead, each partner includes a share of the partnership income or loss on a personal, corporate, or trust income tax return. Each partner also has to file either financial statements or one or more of the following applicable forms: Statement of Business Activities (form T2124), Statement of Professional Activities (form T2032). You do this whether or not you actually received your share in money or in credit to your partnerships capital account.

A partnership has to a file a partnership information return if, throughout the fiscal period, it has six or more partners or if one of its partners is a partner of another partnership.