Partnerships

Partnerships

There are several different kinds of partnerships that one may establish in Ontario. A partnership arises where two or more persons carry on business together for profit.  Generally speaking however, partnerships are not utilized as a preferred business organizational arrangement due to the flow through of liability as well as the flow through of revenue and expenses to the partners. Most prefer to operate their business via a corporation which will house and limit the liability of the business as well as its revenue and taxation within this separate legal entity.

General Partnerships

In a general partnership, all partners share equally in the profits, losses, and management responsibilities of the business. This also means that each partner has unlimited personal liability for the debts and obligations of the partnership. This means that personal assets may be at risk to satisfy business debts. General partnerships are relatively simple to form and operate, typically requiring only a partnership agreement between the partners.

General Partnership – Limited Partnership (GP-LPs)

A GP-LP consists of two types of partners: general partners and limited partners.

General partners are responsible for managing the business and have unlimited personal liability for the partnership’s debts. Limited partners contribute capital to the partnership but have limited liability, meaning their liability is restricted to the amount of their investment. Limited partners generally do not participate in the day-to-day management of the business and may have limited control over business decisions. Limited partnerships are often used for investment or real estate ventures where one party wants to invest capital without assuming active management responsibilities.

Limited Liability Partnership (LLPs)

A Limited Liability Partnership (LLP) is a type of general partnership structure where each partner’s liabilities are limited to the amount they have contributed to the business and limited to the extent of their own liability. Prior to 1998, it was not possible to limit your liability as a partner however in 1998, the Partnerships Act was amended to allow for Limited Liability Partnerships (LLP’s). With LLPs, the personal assets of the partners who are not negligent are not exposed to claims against errors, omissions, negligence, incompetence, or malpractice committed by other partners or by employees of the firm, just as in a corporation. A claimant can only recover against the partner who has acted negligently. That being said, the law does not reduce or limit the liability of the firm. All of the firm’s assets and insurance protection remain at risk.

LLPs are only permitted in Ontario for the sole purpose of carrying on a profession and that LLP must be governed by an Act that allows an LLP to practice as a profession (for example, in the case of midwives, it is the Midwifery Act, 1991, for accountants it is the Public Accounting Act, 2004).

While any kind of business may be carried on through a LLP, in Canada, LLPs are usually limited to regulated professions, such as lawyers or accountants.

Summary

Each type of partnership offers different levels of liability protection, management structure, and tax implications. Choosing the right type of partnership depends on factors such as the nature of the business, the number of partners involved, and the desired level of personal liability protection. It’s important for partners to carefully consider these factors and consult with one of our corporate lawyers to discuss the option that is best suited for you.

Advantages of Partnership

• Oftentimes easy and inexpensive to establish (in the case of general partnerships only)
• Regulatory burden is generally light
• Flow through of revenue and expenses may be an attractive tax feature in some circumstances
• All business income is reported on the partnerships tax return. No separate tax return is necessary

Disadvantages of a Partnership

• Flow through of liability to partners
• Flow though of revenue and expenses to partners