Brooks Barristers and Solicitors
One of the most important decisions to be made when entering into a new Canadian business venture is the ownership type to be used to carry on the business.
The choice you make will have a significant impact on the liabilities you are exposed to, the ease and flexibility of financing, the amount of income tax you pay, the rules and regulations you are governed by, and the amount of time, energy and money you are required to expend in establishing your Canadian business.
Partnerships in Canada:
Description and Establishment of a Partnership
A Canadian partnership exists when two or more persons, whether individuals or corporations (or a combination of both), carry on business in common with a view to profit.
Each of the individual partners has ownership of the business assets, is responsible for the liabilities of the partnership, and has authority to run the business.
Individual partners cannot be employed by the partnership although the partnership can employ others.
Partnerships in Canada may exist in one or two forms, a general partnership or a limited partnership. In Ontario both types of partnerships are governed by statute. The names and pertinent information of all the partners must be registered with the Ministry of Government Services which must be renewed every five years. If a partnership fails to register in Canada, the partnership and the individual partners cannot maintain a proceeding in a court in Ontario.
In order to establish the terms of the business and to protect partners in the event of disagreement or dissolution of the partnership, a partnership agreement should be drawn up with the assistance of a business lawyer.
Partnership Liability in Canada
With respect to personal liability, similar to a sole proprietorship, a partnership is not a separate legal entity from the partners who make up the partnership. Each partner in a Canadian partnership is an agent of the partnership and of the other partners, and therefore the actions of one partner binds each of the other partners.
Each partner is jointly and severally liable, with all of the other partners to the full extent of his or her personal assets, for the obligations of the Canadian partnership which were incurred or tortious acts committed while the individual was a partner.
Partners in Canada also have a duty to one another to be loyal and act in good faith and cannot compete with the partnership.
In a limited Canadian partnership, the liability of the general partner(s) is unlimited, and the liability of the limited partner(s) is limited to the amount invested in the limited partnership. Limited partners are sometimes referred to as "silent partners" who contribute capital, but do not share in the management or liabilities of the partnership.
Many insurance companies in Canada offer personal liability coverage for partnerships, allowing for some risk management of liabilities. In addition, well-negotiated and drafted agreements written by a business lawyer may also limit some trade related liabilities.
Financing of a Partnership in Canada
As in a sole proprietorship, a Canadian partnership is generally more difficult to finance, depending mainly on the personal credit and financial resources of the partners. However, since there is the ability to have limited partners, this allows for an "equity" type of investment.
Taxation of a Partnership in Canada
For income tax purposes, a partnership in Canada is treated as a conduit through which income is passed to the individual partners. A partnership does not pay income tax, as the individual partners pay income tax on all income earned from the partnership.
If an individual expects a new Canadian business to lose money in its first few years and the individual has income coming in from other sources, he or she may wish to choose a partnership as the entity for carrying on business, as the losses from the new business can be used to offset income received from other sources.
Brooks Barristers & Solicitors is a boutique business law firm located in Toronto, Ontario specializing in serving the needs of entrepreneurs, privately-owned Canadian businesses and their principals.