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Should You Run Your Business Through a Limited Liability Partnership?

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Should You Run Your Business Through a Limited Liability Partnership?

The Limited Liability Partnership:

What is a partnership structure? A partnership arises where two or more persons carry on business together for profit. A Limited Liability partnership is a type of general partnership structure where each partner’s liabilities is limited to the amount they put into the business. Limited liability means that if the partnership fails, creditors cannot go after a partner’s personal assets or income.

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. While limited liability is one of the most salient advantages, there are other very good reasons to run your company as a partnership. Here is a list of the most compelling reasons to run your business as a partnership:

Limited Liability Partnership
(click to enlarge)

Fluid Governing Structure:

With a partnership structure, partners have complete freedom on how the business is governed and structured. With its fluid structure, partnerships do not have to report their activities to anyone and partners can come up with any way they like to manage the organization. This fluid governing structure allows assets and funds to be moved in and out of the business with ease.

Simplified Tax Structure

A partnership is a pass-through tax entity. A pass-through entity is a special business structure that is used to reduce the effects of double taxation. That means that there is no tax paid at the partnership level. Instead, the partnership’s income is allocated among the partners, who pay income tax at the individual partner’s level. While this simplified structure avoids double taxation, if a partner is earning at a high tax bracket, will be difficult to shield his income from a high tax rate.

Excellent Tax Planning Tool

Having a partnership that is expected to incur losses in its first year can be a great tax planning tool. If you continue to be employed and earn T4 salary income, you can write off your partnership’s start-up costs pay less tax on income earned through your regular employment.

 Lower Cost in the long Run

While partnerships need to be established with a partnership agreement, which will incur a higher start-up cost, in the long run, the costs are lower as there are no annual tax filings or legal fees incurred on a regular basis.

With all the advantages of running your business entity as a partnership, shouldn’t every business consider this type of structure?

Well, no. Since a limited liability partnership is only available to accountants, lawyers, and doctors, most other business partnerships are not afforded that protection. In fact, since there is no separate liability of a general partnership, each partner is jointly liable for the debts of the business. In summary, while there are many advantages, it is wise to consult with a business or tax lawyer to determine if it makes sense for you.

F.A.Q’s:

What is a limited liability partnership?
A limited liability partnership is a partnership where the partners are not personally liable for the negligent acts of other partners that is available only to accountants, lawyers and doctors.
What are the tax advantages of a partnership?
All income flows through to the partners as there is no tax paid at the partnership level. Therefore, there is not double taxation. This also means that excess income will not be shielded from tax.
What is the main disadvantage of a partnership?

Each of the partners is jointly liable for the debts of the business. Therefore, if a partnership incurs debts greater than its assets, creditors can look at the personal assets of the partners.

-Shira Kalfa, BA, JD, Partner and Founder

© Kalfa Law 2020

The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.

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