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 though of revenue and expenses to partners
- Flow through of liability to partners
FAQs
No. A written partnership agreement is not legally required. A general partnership arises by operation of law the moment two or more people carry on business together with a view to profit, with or without any written document. However, where there is no written agreement, the Partnerships Act supplies default rules that most partners would not have chosen for themselves, and a partnership operating without a written agreement is a partnership living with statutory results it has not chosen. A written agreement is strongly recommended in nearly every case and is essentially mandatory for limited partnerships and LLPs.
Generally not, for an operating business. Partnerships expose the partners to unlimited joint and several liability for partnership debts and for the acts of other partners; are taxed on a flow-through basis at personal marginal rates rather than at the small-business corporate rate; and do not allow the partners to access the lifetime capital gains exemption on a future sale. A partnership is sometimes the right vehicle for narrow, low-liability commercial settings or for investment structures that need the flow-through treatment, but a generic operating business is generally better served by a corporation.
Only members of regulated professions whose governing statute authorizes the structure. The most common LLPs in Ontario are law firms (under the Law Society Act), accounting firms (under the Public Accounting Act, 2004), and certain other regulated practices. The general operating business cannot form an LLP and is generally better served by incorporating.
On a flow-through basis. The partnership computes its income at the partnership level for tax purposes and allocates that income to the partners in their proportionate shares; each partner reports their allocated share on their own tax return at their own rate. The partnership itself generally files an information return on CRA Form T5013 but does not pay income tax in its own right.
Generally yes, where the transition is properly structured. Sections 85 and 97 of the Income Tax Act allow tax-deferred rollovers of partnership interests and partnership property into a corporation in exchange for shares, on conditions that mirror the conditions of an ordinary Section 85 rollover. The work is detailed and unforgiving of error; the elected amounts, the share consideration, and the timing of the dissolution all have to align, and it is generally one of the more involved tax-driven reorganizations a small business will undertake
A general partnership forms automatically once two or more people carry on business together for profit, even without a written agreement. If the partnership operates under a name that isn't the partners' legal names, that business name must be registered under Ontario's Business Names Act. Limited partnerships and LLPs require separate filings.
In a general partnership, all partners share management and have unlimited personal liability. In a limited partnership, general partners run the business and carry unlimited liability, while limited partners contribute capital, stay out of day-to-day operations, and have liability capped at their investment. LP structures are common in real estate and investment ventures.
Yes. In a general partnership, each partner is jointly and severally liable for the debts and obligations of the partnership, including those arising from another partner's acts within the ordinary course of the business. A creditor can pursue any one partner for the full amount owed.
Under Ontario's Partnerships Act, a general partnership is dissolved when a partner leaves, retires, or dies unless the written partnership agreement says otherwise. A well-drafted agreement should set out buyout mechanics, valuation, insurance funding, and continuation rules so the departure of one partner doesn't unwind the business.
A partnership is an ongoing business carried on by two or more people for profit, with shared liability and flow-through tax. A joint venture is a contractual arrangement for a specific project or undertaking, with each party retaining its own tax position and limited mutual liability. The distinction often turns on intent and conduct, not labels.
Yes. Partners can transfer the partnership's assets into a new corporation on a tax-deferred basis using a section 85 rollover, avoiding tax on accrued goodwill and appreciated assets. We coordinate the legal transfer and the joint election so the rollover is filed correctly and the cost base is preserved.
