Business Empire
Business Partnerships In Canada
When it comes to starting a business in Canada, it doesn’t have to always be a one-person operation. In fact, many successful business do very well by building a strong network of relationships to rely on. To take it one step further, individuals (or entities) may pool their resources to operate a shared business in the form of business partnerships. Here in this article, we talk about everything you need to know about the basics of business partnerships in Canada.
What is A Partnership
Here in Canada, each province may have it’s own of what a partnership is, in terms of a business context. In General, a partnership is a relationship that exists between individuals (or entities) for the purpose of a business operation with a shared goal. A partnership seeking registration as a business operation will typically need to have a partnership agreement. This agreement generally defines the rules of the business operation. These rules include the specifics of sharing profit and loss, and who has signing authority in situations such as the sale of the business or transfer of ownership. This is important as it identifies who has the authority to bind the partnership. While statutory requirements under the Partnerships Act provide that partnership agreements can be oral or written, an agreement in writing provides evidence the partnership exists. In general, there are 3 basic types of partnerships available to Canadian businesses – general partnership (GP), limited partnership (LP), and limited liability partnership (LLP)
General Partnership (GP)
A general partnership, the most common type of partnership, refers to a business agreement where two or more individuals (or entities) agree to share all assets, profits, and legal and financial liabilities. This means that all partners can be held responsible for the debts the partnership takes on. Each partner in a general partnership contributes to the day-to-day management of the business and has the authority to make business decisions and legally bind the company in contracts. As such, General partnerships offer the flexibility to structure a business as required, which allows partners to control operations more closely. Regardless of the industry, these are the basic aspects of being a general partner:
- General partners pool their funds to raise capital and manage the operation.
- Company directions and decisions are shared to all partners with important decisions made by voting among partners.
- With signing authority in a general partnership, the leading practice is that all partners are required to sign.
- Unlike publicly traded companies on the stock exchanges, such as Amazon, public accounting and reporting are not required. However, general purpose financial information, such as revenues, expenses and cash flow management, are needed to run the company and satisfy bankers, vendors, tax collectors, etc.
- Each partner is taxed personally on their share of partnership income and taxable income is subject to individual personal tax rates.
- As a general partner, they are liable for all assets and liabilities of the partnership. Therefore, each partner’s personal assets can be seized to settle the claims, if the business is sued.
Limited Partnership (LP)
A limited partnership is an investment arrangement that has at least one general partner who operates the business without limited liability protection, while the other partner(s) is a limited partner, who does not get involved in the business operations, but has contributed financially. The general partner(s) gets a bigger share of the earnings in exchange for increased contributions and risk. The limited partner, sometimes known as a “silent partner,” often serves solely as an investor in the business, and their liability is limited to the amount of capital they have contributed. In a limited partnership, the basic features of being a general partner can be summarized in the section above. Similarly, here are basic aspects of being a limited partner:
- Limited partners contribute their funds to raise capital with limited/no operation management.
- Company directions and decisions are shared to all share partners.
- With signing authority in a limited partnership, the limited partner(s) does not have the signing authority while the general partner(s) has the signing authority that is subjected to some restrictions.
- Unlike publicly traded companies on the stock exchanges, such as Amazon, public accounting and reporting are not required. However, general purpose financial information, such as revenues, expenses and cash flow management, are needed to run the company and satisfy bankers, vendors, tax collectors, etc.
- Each partner is taxed personally on their share of partnership income and taxable income is subject to individual personal tax rates.
- As a limited partner, they are not liable for all assets and liabilities of the partnership. The liability of the limited partners is capped by the amount of capital they contribute. Therefore, only the general partner’s personal assets can be seized to settle the claims, if the business is sued.
Limited Liability Partnership (LLP)
A limited liability partnership is a business agreement that is formed by two or more individuals (or entities) who desire to conduct business for profit. In limited liability partnership, it is similar to a general partnership but it also gives the partners more liability protection than they would have as general partners. As a partner they are liable for any wrongful acts that they commit and is held responsible for someone that they supervise. However, the partner’s personal liability is limited to his capital contribution in the limited liability partnership. Therefore, a partner’s personal assets are not at risk for the mistakes committed by another partner or because of the company’s losses or debts. For example, a client feels wronged or injured and wanted to sue the business, 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.
In Canada, limited liability partnerships are only allowed in high-risk professional environments where the daily business activities of each partner have minimal overlap, such as lawyers, accountants, architects, or doctors. In addition, they are governed by provincial legislation, and the protection provided differs from province to province.
Which One Is Right For Me
Every business venture is different. We advise you to speak to a professional accountant or lawyer to see which business partnership is right for you. A little effort now goes a long way.
Interested In Learning More?
Real Estate Chattels and Fixtures – What’s Included and What’s Not Sometimes, life throws you a curve ball. Imagine yourself finally getting …
Real Estate Home Improvements – Inexpensive Projects You Can Try For Big Returns It’s always a good idea to spruce up the …
Real Estate Property Easements – Enjoying Your Property To Its Fullest When it comes to real estate, what you don’t know CAN …
Our Promise To You
Fung Finances is a free service. We are not an accountant, financial advisor, law firm, “lawyer referral service,” or a substitute for an accountant, financial advisor, attorney, or law firm. Always do your own due diligence and never blindly listen to a random article on the internet. We do our best to provide financial education with our free videos, articles, tools, and other self-help content. But these are for informational purposes only, they’re not investment advice.
Fung Finances does not and cannot guarantee the accuracy or applicability of any information regarding your individual circumstances. The examples we provide are hypothetical and we encourage you to get advice from a qualified professional regarding specific investment, tax, legal, and financial issues. Previous market performance does not guarantee future performance.
We want everyone to be able to make educated financial decisions. We do not feature every company or financial product available. However, we’re proud of the financial education and guidance that we provide at no charge.
We’re paid by our brand partners and advertisers. This may influence which products we mention, review, and where they appear on our site. But it does not affect our recommendations or advice.