Hey guys! This is our post digging into some key points about business partnership in Ontario.
I am a Canadian lawyer and have now been practicing law for more than ten years. Over these ten years, I have had the privilege of working with numerous clients, including lots of entrepreneurs.
I like working with entrepreneurs. Entrepreneurs want to make something happen, they have a passion and are prepared to work hard to turn their dream into a reality. It's fun working with people like that.
Last year, when we first got locked down, I was shocked. As time goes on, I also see that I am very fortunate. I've started thinking about giving something back. One result is this blog, which I hope will become a source of credible, reliable information. This first set of blog posts aims at being a resource for guys (and girls) who may be first-time entrepreneurs.
So, we are digging into some basics about the types of structures someone in Toronto can use to run a business. Today's post is all about "partnerships."
It's all good, man. Scroll down to find out more.
Overview of Business Partnerships in Ontario
The word partnership gets used in various contexts within the law. For instance, of course, there is the notion of a domestic partnership.
But, in fact, the world of business affairs is the original context for the law's use of the term partnership.
A business partnership is a way of organizing a business venture where ownership and management is split between two or more persons. Section 2 of the Ontario Partnerships Act, puts the matter in more technical terms:
"Partnership is the relation that subsists between persons carrying on a business in common with a view to profit, but the relation between the members of a company or association that is incorporated by or under the authority of any special or general Act in force in Ontario or elsewhere, or registered as a corporation under any such Act, is not a partnership within the meaning of this Act."
In fact, three types of business partnerships are possible in Canada. They are a general partnership, a limited partnership, and a limited liability partnership.
The general partnership ("General Partnership") is the most common type. Today's post is about the General Partnership.
Let's dive into some key features of a General Partnership.
- First, a partnership is typically established through a written partnership agreement;
- Second, each partner is personally liable for the partnership's obligations in a partnership;
- Third, a partnership does not pay income tax directly;
- Fourth, a partnership is not a separate legal entity, and it accordingly does not enjoy eternal existence.
Key Point 1: Partnership Agreement
A General Partnership is fundamentally a legal relationship. As with most types of legal relationships, it is best to get things in writing.
In a business partnership, a written agreement is negotiated and then signed between all of the partners. There will, of course, be at least two partners; and, there could be more than two partners. Furthermore, the partners might be natural persons, i.e., people, or legal persons, such as corporations.
The partnership agreement will set out each partners' contribution to the partnership, i.e., for use in the underlying business venture. The partnership agreement will also set out how decisions are to be made, the duties of each partner, and how any profits will be distributed as well as other details of how the business will operate.
Key Point 2: Personal Liability
As opposed to a corporation, a partnership, is not a separate entity from its owners. In this respect, a partnership is similar to a sole proprietorship.
A partner in a business partnership may become personally responsible for all of the liability flowing from the business venture, including the conduct of the other partners. A couple of general points about liability might be helpful.
Limited liability does not apply in the case of a partnership. As a result, if the partnership's business incurs debts greater than its assets, creditors are entitled to go after the partners' personal assets.
Also, the word liability refers to both accounting and legal obligations. In accounting, liabilities are financial obligations, such as loans or mortgages payable, accrued expenses due, and accounts payable. In the law, a liability is a responsibility for the consequence of actions or omissions. The partnership relationship means that one partner may be legally liable for the actions of another partner.
Therefore, a partner in a General Partnership should have sufficient resources to shoulder personal responsibility for all of the liability flowing from the business venture, including the conduct of the other partners.
Key Point 3: Tax Treatment
The third key feature of a partnership relates to taxes, and this point flows from the fact that the partnership is not a separate legal entity. The partnership is not a distinct legal entity, and the partnership does not pay income tax. Instead, profit or loss, as the case may be, "flows through" from the partnership to the partners.
The partners then pay tax on this income on their individual tax return. The result is sometimes called 'tax simplicity'. For a first time entrepreneur with limited income this may not be a problem. But, an individual with more income may find that the partnership provides limited options for avoiding excessive tax liability at any given point in time. In other words, the benefit of 'tax simplicity' needs to be balanced against relatively less 'tax flexibility.'
Also, because the partnership does not file for or pay its own income tax, the associated administrative fees may be less than in the case of a corporation.
Key Point 4: Limited Existence
Finally, a fourth key feature flows from the partnership's lack of a separate legal identity. The partnership does not enjoy indefinite existence. Upon the death of a partner, a partnership will cease to exist. This is sometimes called the mortality of the partnership.
While a corporation continues to exist irregardless of its founders or other shareholders' status, a partnership will cease to exist if one of its partners passes away. Depending on the circumstances, this may lead to hardship on the business and those operating within the business at the time of the mortality of the partnership. Furthermore, the mortality of the partnership can create complications with transferring the business to the next generation.
Alternatives
You may now be wondering: "are there any other options for structuring my business."
Yes! There are most definitely other options. Here is a brief rundown.
Limited Partnership or Limited Liability Partnership
For some businesses, a general partnership may not be the right choice because of s pecific concerns about legal liability. For example, suppose the business will be operating in a highly regulated part of the economy or engaged in inherently dangerous activities. In that case, it is a good idea to think seriously about risk. Some businesses will decide to create either a limited partnership or a limited liability partnership.
Co-operative
A co-operative is a legally incorporated corporation with two additional characteristics. It is owned by its members who work in the business. The members either use its services or purchase its products. A co-operative may be structured as either a for-profit or a non-profit entity. Depending on the principles and priorities of the owners, a co-operative can have many advantages. Very generally, it is probably only worth looking into the co-operative structure if a large team with shared priorities is going to be involved in your business.
Sole Proprietorship
A sole proprietorship is simply put a business owned and operated by a single individual. It can do business under the owner's name or under a trade name that the owner has chosen (subject to certain limitations.) The rules for a sole proprietorship will vary slightly depending on the province or provinces in which you intend to carry out business. For information on this structure, please check out our upcoming post.
Corporation
A corporation is a distinct legal entity. In a nutshell, a corporation is a 'legal person' that is created by the combination of initiative by one or more persons and applicable legislation. Incorporation is a powerful legal structure that has both legal and business advantages. We are going to be blogging all about incorporation in the coming weeks.
Peace Out
What was this post all about??
This post has provided a high-level answer to the question of what is a business partnership. As our blog grows, we can come back to the topic of business partnerships. I will write in more detail about specific features of business partnerships.
Whether you are considering to start a partnership or to join an existing partnership, it really is essential to know and understand the legal details. The first document you need to familiarize yourself with is the partnership agreement.
If you have questions about either general partnerships or partnership agreements, please consider if it might be a good fit for this blog. I am happy to write more about this topic.