Partnership in Canada

Sep 18, 2023

 

In a business partnership in Canada, multiple legal entities come together to collectively run a business. These “legal entities” can include individuals, corporations, trusts, or partnerships.

When forming a new business partnership, the resources contributed by each partner are not limited to monetary assets. A partner’s contribution can take the form of skills, labor, or property.

While all partners bear the same risks associated with the business, the distribution of profits, losses, and liability may or may not be shared equally among them. The partnership agreement determines each partner’s share, and the extent of liability varies based on the type of partnership established.

Types of Partnership in Canada

There are three types of partnerships available to Canadian businesses.

1. General Partnership

In a business partnership, multiple legal entities come together to collectively run a business. These “legal entities” can include individuals, corporations, trusts, or partnerships.

When forming a new business partnership, the resources contributed by each partner are not limited to monetary assets. A partner’s contribution can take the form of skills, labor, or property.

While all partners bear the same risks associated with the business, the distribution of profits, losses, and liability may or may not be shared equally among them. The partnership agreement determines each partner’s share, and the extent of liability varies based on the type of partnership established.

 

2. Limited Partnership

In a limited partnership, there are one or more general partners who hold unlimited liability, and one or more limited partners who have limited liability based on their contributions. To minimize liability, it is common for limited partnerships to have a corporation as the general partner and two or more individuals as limited partners.

A limited partner, also known as a “silent partner,” contributes financially and may offer occasional advice, but typically does not participate in business operations. However, if a limited partner becomes actively involved in running the business, their limited liability protection will be forfeited, and they will become equally liable as a general partner.

Limited partnerships are frequently utilized by businesses to secure funds, as the limited liability feature tends to attract more investors.

 

3. Limited Liability Partnership (LLP)

A limited liability partnership offers partners greater protection against liability compared to being general partners. If a client feels they have been wronged or harmed and wants to file a lawsuit against the partnership, only the assets of the partner who directly worked with or served that client would be at risk. The assets of the other partners would be safeguarded, unlike in a general partnership.

LLPs are typically permitted in high-risk professional fields such as law, accounting, architecture, and medicine, where the daily business activities of each partner have minimal overlap. LLPs are available in all provinces of Canada. However, the specific regulations and level of protection provided by LLPs differ based on the province. You can find the relevant partnership acts for each province using the following links:

– Alberta
– British Columbia
– Manitoba
– New Brunswick
– Newfoundland
– Nova Scotia
– Ontario
– Prince Edward Island
– Quebec
– Saskatchewan

 

Partial Shield

Some provinces, like Alberta and Manitoba, provide LLPs with a certain level of protection. This protection specifically restricts partners from being held responsible for acts of negligence, wrongful acts or omissions, malpractice, or misconduct committed by other partners while providing services. However, it does not safeguard the firm from general contractual claims. Additionally, this protection may extend to cover similar wrongful acts committed by employees who are under the supervision of other partners.

 

Full Shield

In some provinces like British Columbia (B.C.) and Ontario, there is a form of comprehensive protection called full-shield protection. This protection safeguards the partner from any claims made against the partnership, regardless of whether they arise from contracts or the wrongful actions of other partners. However, partners are still individually responsible for any wrongful acts they commit.

If you have any doubts regarding the extent of protections offered by a Limited Liability Partnership (LLP) in your specific location, it is advisable to seek advice from a lawyer who specializes in business partnerships.

 

The Tax Treatment of Canadian Partnerships

Partnerships are taxed similarly to sole proprietorships in terms of taxes. Partners report their income and pay income tax individually through their personal tax returns. Each partner is responsible for filing their own T1 form and other necessary forms, and they disclose business profits or losses accordingly. To comprehend your tax responsibilities within a partnership agreement, it is advisable to seek guidance from a tax expert.

 

Choose Your Form of Business Ownership Carefully

You don’t have to stick to a single business ownership structure throughout the life of your business, but transitioning from one to another can be difficult and costly. Each type of business structure has its own pros and cons, so it’s important to select the one that aligns with your future goals and current tax situation.

If you opt for a partnership, it’s crucial to have a written partnership agreement in place, regardless of the specific partnership model you’re considering. This agreement will help ensure that all partners have a shared understanding of the business.

 

CBES is here to assist you; feel free to contact us for expert guidance.

 

 

 

 

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