A partnership is an association or relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on a trade or business.
Each partner contributes money, labour, property, or skills to the partnership. In return, each partner is entitled to a share of the profits or losses of the business. The business profits (or losses) are usually divided among the partners based on the partnership agreement.
Like a sole proprietorship, a partnership is easy to form. In fact, a simple verbal agreement is enough to form a partnership. However, most partnerships are governed by a written agreement setting out rules for partners entering or leaving the partnership, the division of partnership income, and other matters.
The partnership is bound by the actions of any member of the partnership, as long as these are within the usual scope of the operations.
The 3 types of partnership legal structures:
1. General Partnership
These are the most common type of partnership. A general partnership is defined as a business arrangement between two or more individuals who share the profits and liabilities of the business.
In a general partnership, each partner is fully personally liable for the debts, contractual obligations, and torts resulting from the partnership's operation, just as in a sole proprietorship. If you are a partner in a general partnership, you could be personally sued for something that happens in the business.
2. Limited Partnership
This is 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. For liability reasons, limited partnerships are often set up with a corporation as the general partner and two or more individuals as limited partners.
A limited partner (also referred to as a "silent partner") contributes financially and may occasionally provide advice, but is not otherwise involved in the business. If a limited partner does become involved in operating the business, they will lose their limited liability status and become just as liable as a general partner.
Businesses often used limited partnerships to raise money, as the limited liability will attract more investors.
3. Limited Liability Partnership (LLP)
A limited liability partnership, as the name implies, gives the partners more liability protection than they would have as general partners. If, for example, a client feels wronged or injured and wanted to sue the partnership, only the assets of the partner who worked with or on that client would be at risk. The assets of the other partners would be protected, which wouldn't be the case with a general partnership.
Payment of taxes on business income
A partnership by itself does not pay income tax on its operating results and does not file an annual income tax return. Instead, each partner includes a share of the partnership income or loss on a personal, corporate, or trust income tax return.
A partnership that carries on a business in Canada, or a Canadian partnership with Canadian or foreign operations or investments, has to file form T5013, Statement of Partnership Income, for each of the fiscal periods of the partnership where, one of the following occurs:
The list above does not include every situation where you may have to file. If you are not sure whether you have to file, call CRA on 1-800-959-5525.
Click on the Partnership Button below to begin the registration application process.
