Partnership is similar to the sole proprietorship except there are two or more owners running the business together and sharing profits. Set up costs can be limited to registration of the partnership but the creation of a Partnership Agreement is recommended to establish the rules the partners will use to operate the business. These rules may include decision-making procedures, allocation of profits and losses, strategies for a partner that may wish to leave the business and methods of dispute resolution. CAUTION: The courts may find that a partnership exists even if the parties did not intend to create a partnership if two or more individuals are operating a business together with a view towards profits. Partnerships are regulated by the Partnership Act
Partnership – A Partnership Agreement can allocate the profits or losses in any ratio agreed to between the partners but if there is no Agreement, the profits must be allocated equally. Business deductions are taken by the partnership before the income is distributed to the partners and claimed on their personal tax returns.
However, General Partnerships are not the only types of partnership arrangements that can be formed. In Canada, there are two other types of partnership:
Limited Partnership – A partnership consisting of one or more general partners, who have unlimited liability, and one or more limited partners, who have limited liability depending upon their contribution to the partnership. Often the limited partner contributes financially but is not otherwise involved in the business.
Limited Liability Partnership – In Canada, a limited liability partnership is often 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.
A Partnership Agreement can allocate the profits or losses in any ratio agreed to between the partners but if there is no Agreement, the profits must be allocated equally. Business deductions are taken by the partnership before the income is distributed to the partners and claimed on their personal tax returns.
Advantages of partnership: Shared risk, shared management.
Disadvantages: Risk of conflict between partners, shared decision making