Choosing the right legal structure is a pivotal decision for small business owners in Ontario. While incorporation is a popular choice, many entrepreneurs opt for a business partnership due to its simplicity and flexibility. Understanding the nuances of partnerships can help determine if this structure aligns with your business goals.
What Is a Partnership?
A partnership is a business arrangement where two or more individuals, corporations, trusts, or other partnerships agree to operate a business together. In Ontario, partnerships are governed by the Partnerships Act and can be categorized into:
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General Partnerships: All partners share equal responsibility for managing the business and are jointly liable for debts and obligations.
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Limited Partnerships: Consist of general partners who manage the business and have unlimited liability, and limited partners who contribute capital and have liability limited to their investment.
Forming a partnership can be as straightforward as a verbal agreement, but it’s advisable to have a written partnership agreement outlining roles, profit sharing, and procedures for resolving disputes.
Benefits of a Partnership
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Ease of Formation: Partnerships are relatively simple and inexpensive to establish compared to corporations.
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Combined Resources and Expertise: Partners can pool their financial resources and diverse skills, enhancing the business’s potential for success.
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Tax Advantages: Partnerships themselves are not taxed. Instead, profits and losses are passed through to partners, who report them on their personal tax returns, potentially resulting in tax efficiencies.
Downsides to Consider
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Unlimited Liability: In general partnerships, each partner is personally liable for the business’s debts, which can put personal assets at risk.
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Potential for Disputes: Differences in vision, workload distribution, or financial decisions can lead to conflicts among partners.
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Limited Access to Capital: Partnerships may face challenges in raising funds compared to corporations, which can issue shares to attract investors.
Partnerships in the Canadian Business Landscape
Understanding the prevalence of different business structures in Canada provides context for choosing the right one. While specific statistics fluctuate over time, historically, sole proprietorships have been the most common, followed by corporations and partnerships.
Who Should Choose a Business Partnership?
A business partnership might be suitable if:
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You plan to collaborate with one or more individuals who bring complementary skills or resources.
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You seek a straightforward and cost-effective business structure.
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The business involves moderate risk, and you’re comfortable with the implications of shared liability.
However, if limiting personal liability, attracting significant investment, or planning for substantial growth are priorities, incorporating your business may be more appropriate.
For further exploration, check out the Province of Ontario website. If you already have a partnership and are wondering if incorporating might be more advantageous, reach out to us. We’re here to help.
