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Choosing a Form of Business Ownership

Part 2: General, Limited and Limited Liability Partnerships

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Partnership - forms of business ownership in Canada.

Partners working in their florist shop.

Image (c) Nicola Tree / Getty Images

If you don't want to go it alone and be the sole owner and operator of your business, you may wish to legally set up your business as a partnership.

You can create a partnership between two people, or among thirty; the law doesn't set a limit on how many partners may be involved.

There are three types of partnership in Canada, but whether you can legally set up any kind of partnership other than a general partnership depends on what province or territory your business will operate in and what kind of business you're in.

The General Partnership

The most common type of partnership is the general partnership. In a general partnership, each partner is jointly and severally liable for the debts of the partnership.

The Limited Partnership

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.)

The Limited Liability Partnership

In Canada, a limited liability partnership is usually only available to groups of professionals, such as lawyers, accountants and doctors. These partnership agreements are governed by specific provincial legislation. For instance, currently in Ontario, only lawyers, chartered accountants and certified general accountants may form a Limited Liability Partnership.

Advantages and Disadvantages of a Partnership

A partnership can sign contracts and borrow money in its own right, which eases some of the liability burden a sole proprietorship would bear.

The main advantage of the partnership, however, 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. If one partner has skills and talents the other doesn't, a partnership can truly be a match made in heaven.

And partnerships have the same tax simplicity that sole proprietorships have. 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.

However, in a general partnership, 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.

Another disadvantage of a partnership that many people don't think of until it happens is that partnerships can be the messiest, most acrimonious form of business ownership to dissolve. If you do decide to form a partnership of any type, a partnership agreement is essential. 10 Questions Good Partnership Agreements Need to Answer explains what such an agreement should cover.

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 corporate form of business ownership are outlined on the next page.

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