Under Canadian corporate law, two common business arrangements are partnerships and join ventures. While these terms are frequently used interchangeably, they represent distinct legal entities with unique characteristics and regulatory frameworks.
Partnerships
A partnership is a formal arrangement whereby two or more individuals or entities come together to operate a business for profit.
Under the Partnership Act, a partnership is typically formed when parties agree to share the profits and losses of a business venture. It is important to note that if the partnership operates under the exact names of the partners, no formal registration is necessary. Nevertheless, it is advisable to draft a partnership agreement outlining the terms of the partnership, including profit sharing, management responsibilities, and dispute resolution.
To the extent the partnership wishes to operate under a name other than the strict names of the partners (for example instead of Jane Smith & John Doe the partners wish to operate as ‘Vanguard Consultants’ or ‘Jane’s Decadent Chocolates’), Ontario Business Names Act requires that the name be registered.
General partnerships are the basic and most common type of partnership. Under a general partnership, all of the partners share in the responsibility and liability of the business. Each partner has joint and several liability for the debts and obligations of the partnership as a whole. This means that if one partner fails to meet their obligations, the other partners may be held responsible for covering those debts. This liability also extends to personal assets similar to a sole proprietorship.
Limited partnerships are a bit different. They are comprised of at least one general partner and one limited liability partner. The general partner has the same powers, responsibilities and liabilities as partners do in a general partnership. But, the limited liability partners are not responsible for the business losses and their exposure is limited to the amount which they have invested.
Partnerships are typically established for an ongoing business purpose. The relationship is intended to be long-term, with partners working together to achieve continuous profitability. The partnership continues until the partners decide to dissolve, however as a whole, a partnership is typically established to house a long term relationship.
Just as liability flows through, so does tax. Partnerships are treated as pass-through entities for tax purposes in Canada, meaning the income is taxed at the individual partner level rather than at the partnership level. Partners report their share of the partnership income on their personal T1 Income Tax Return.
Joint Ventures
A joint venture, on the other hand, is a specific business arrangement in which two or more parties collaborate on a particular project or business activity while maintaining their separate legal identities. Joint ventures can be formed through a formal agreement, and unlike partnerships, they may involve a contractual relationship rather than a sharing of profits from a common enterprise. In other words, partnerships are generally established to house a long term business relationship of a business model, whereas a joint venture is typically entered into to profit share within a certain slice of that venture or business model. In a joint venture, two companies come together and agree to profit share with respect to one particular product line, project, collaboration, or real estate development.
In Canada, joint ventures are often governed by contract law, and the terms of that contract will vary from venture to venture, carefully tailored to meet the needs of the parties in that particular project.
In a joint venture, liability is generally limited to the contributions made by each venture party which is set out in the joint venture agreement. This structure can provide a layer of protection for the individual assets of each party involved. However, liability may vary based on the terms of the joint venture agreement and the nature of the project, particularly if a new entity is formed to undertake the joint venture.
In contrast to partnerships which are often established for the long term, joint ventures are often created for a specific, time-limited project or goal. Once the project is completed, or the specific objectives are achieved, the joint venture is dissolved without affecting the ongoing operations of the parties’ respective businesses. This makes joint ventures a flexible option for businesses seeking to collaborate on specific initiatives without committing to a long-term partnership.
The tax treatment of joint ventures can be more complex and may depend on whether the joint venture is structured as a partnership or a corporation. If structured as a partnership, similar pass-through taxation applies as above. However, if a separate legal entity is formed, the joint venture may be taxed independently, which can lead to different implications for the parties involved.
Conclusion
Both partnerships and joint ventures can offer unique advantages under Canadian corporate law. Partnerships provide a framework for ongoing business relationships with shared liabilities, while joint ventures offer flexibility for specific projects with limited liability. Companies should carefully consider their goals and tax considerations when choosing the appropriate structure for their collaborative efforts. If you are looking to establish a partnership or business arrangement, contact us for further assistance.
Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and private M&A law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law.
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The above provides information of a general nature only. This does not constitute legal or accounting 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.
