If you are not the sole owner and operator of your business, you may wish to legally set up your business as a partnership.
A partnership is a legal relationship between persons carrying on a profit-motivated business. It may be a partnership between two people, or among thirty; the law doesn’t set a limit on how many partners may be involved.
A partnership can sign contracts and borrow money in its own right. There are two types of partnership, but depending on what type of business you're involved in, you may have only one type to choose from when you're choosing a form of business ownership.
The most common type is the general partnership. In a general partnership, each partner is jointly and severally liable for the debts of the partnership. This means that one partner can be held responsible for all debts and obligations incurred in the name of the business by another partner. As a partner, you can also be held responsible for any wrongful act or omission by other partners acting in the ordinary course of the firm’s business - which can be a serious disadvantage.
The main advantage of the partnership, then, lies in the working relationship between the partners rather than in the legal structure of the company. The most successful partnerships are those where the partners have complementary talents, and are comfortable sharing the decision making. Choose your business partners carefully!
A limited partnership is an arrangement where a person can contribute to a business without being involved in the affairs of the partnership. As a limited partner, your liability to the firm or its creditors is limited to the amount you invest in the firm. To remain a limited partner, you must take no part in the management of the firm or act on behalf of the company, or you become a general partner. (In some provinces, only certain kinds of businesses are allowed to operate as limited partnerships.)
Partnerships do not have to file separate income tax returns or pay separate income tax, as the financial information from the partnership is combined with the personal income of the partners to determine their overall tax liability. In other words, if you choose the partnership form of business ownership, you'll still file your taxes using the T1 income tax form.
Many people are uncomfortable with the sole proprietorship and partnership forms of business ownership because of the amount of personal liability involved. If this describes you, you may wish to consider incorporating your business. The advantages and disadvantages of the corpoate form of business ownership are outlined on the next page.
