Is a Partnership Structure the Right Choice for your Business?
Before you can make it big in business, you need to go through the tedious and invisible (but totally necessary) steps of setting the groundwork. Part of that process should include deciding on your business ownership structure. There are three main types of business structures in Canada, each with its own advantages and disadvantages.
Carefully considering your business structure and setting it up correctly from the beginning will save you time, effort, and money in the long term. Keep in mind, it’s possible to move between ownership types as your business evolves.
In this three-part blog series, we’ll look at the pros and cons of the primary business structures: the Sole Proprietorship, (find it here), the Incorporated Business, (coming soon) and the Partnership, outlined below. We recommend meeting with a lawyer and accountant for customized and professional advice on which business structure is right for you.
Partnership businesses are relatively easy to set up and offer the opportunity to pool resources. However, they can sometimes lead to internal conflicts, and they don’t offer the same tax advantages or limited liability as a corporation.
What is a Partnership?
A partnership business structure involves two or more individuals who agree to share the ownership, responsibilities, and profits of a business. Partnerships can be an attractive option for those looking to combine resources, expertise, and capital.
what are the Types of business Partnerships?
General Partnership (GP): Partners share management responsibilities and are jointly and severally liable for the partnership's obligations. (Like a sole proprietorship but with more than one owner.)
Limited Partnership (LP): Includes both general and limited partners. General partners manage the business and have unlimited liability, while limited partners have liability limited to their investment and do not participate in management.
Limited Liability Partnership (LLP): Common for professional services (e.g., lawyers, accountants). Partners have limited liability for the partnership's debts, except for their own negligence or misconduct.
What are the Advantages of a business Partnership?
Easy to Establish: Simple to set up compared to a corporation, with fewer formalities and lower costs.
Combined Resources and Expertise: Partners can pool their resources, skills, and expertise to enhance the business.
Shared Responsibility: Workload and management duties are shared among partners, reducing individual burden.
Tax Benefits: Profits are passed through to the partners and taxed at their individual income tax rates, potentially avoiding double taxation.
What are the Disadvantages of a business Partnership?
Unlimited Liability: In a general partnership, partners are personally liable for the business's debts and obligations, which can risk personal assets.
Potential for Conflicts: Disagreements between partners can arise, potentially affecting business operations.
Shared Profits: Profits must be divided among partners, which may not always align with individual contributions or expectations.
Limited Continuity: The partnership may dissolve if a partner leaves, retires, or passes away, unless otherwise stipulated in the partnership agreement.
Difficulty in Raising Capital: It may be more challenging to attract investors compared to a corporation.
How do you set up a business Partnership?
The process for setting up a partnership is similar to that for setting up a sole proprietorship, with a few extra steps.
1. Choose the type of partnership
General Partnership (GP), Limited Partnership (LP), or Limited Liability Partnership (LLP).
2. Create a partnership agreement
While not legally required, it's highly advisable to have a written partnership agreement that outlines:
Roles and Responsibilities: Clearly define each partner's duties and authority.
Profit and Loss Sharing: Specify how profits and losses will be distributed.
Decision-Making Process: Establish procedures for making business decisions.
Dispute Resolution: Outline methods for resolving conflicts between partners.
Exit Strategy: Detail the process for a partner to leave the partnership and what happens to their share.
3. Choose and register a business name
Name Requirements: Ensure your business name is not misleading and not the same or too similar to a name already in use. Duplicate business names may exist. However, if you choose a name that is the same as, or similar to an existing business name or trademark, the owners could pursue legal action, and you may have to change your name or pay damages to the owners. Avoid this potential hassle by making sure your potential business name is legally available with a NUANS (Newly Upgraded Automated Name Search) through most government registry offices. Conducting a name search is not mandatory but highly recommended. Additionally, your business name cannot use the words ‘limited’, ‘incorporated’, ‘corporation’, or any of the associated abbreviations (Ltd., Inc., Corp.), as this would inaccurately imply you’re running a corporation.
Keep in mind that registering provides proof that a name is being used by a particular business, but it does not grant you ownership rights of the name. To ensure you have exclusive legal rights to a business name, you will need to register it as a trademark.
Visit a Registry Office: Go to an authorized Alberta registry agent office, pay the fee (usually under $150), and fill out the appropriate form:
For a General Partnership, complete the "Declaration of Partnership" form.
For a Limited Partnership, complete the "Declaration of Limited Partnership" form.
For a Limited Liability Partnership, complete the "Declaration of Limited Liability Partnership" form.
4. Obtain necessary licenses and permits
Check with your local municipality to see if you need a business license to operate legally in your area. Depending on your business activities, you may also need additional permits or licenses. For example, food-related businesses may require a health inspection and a Food Safe certificate. BizPaL is free, searchable database that shows Canadian business owners the permits and licenses required to operate. The service is a collaboration between federal, provincial and municipal governments.
5. Register for GST/HST
If your gross business revenue exceeds $30,000 in a calendar year, you must register for a GST/HST account with the Canada Revenue Agency (CRA).
6. Register for payroll remittance accounts
If you plan to hire employees, you will need to file and remit payroll taxes and comply with employment regulations.
7. Open a business bank account
Open a separate business bank account to keep track of your business finances. You may want to set up a two-to-sign feature so one or more partners must authorize transactions above a certain amount.
8. Maintain proper records
Keep accurate and detailed records of all business transactions, expenses, and income. This will help you manage your finances, fulfill tax obligations, and can be especially important in resolving disagreements between partners.
Summary
A partnership is a flexible and straightforward business structure that allows two or more individuals to collaborate and share the benefits and responsibilities of owning a business. While it offers advantages like easy establishment and combined resources, it also comes with risks such as unlimited liability and potential conflicts. Proper planning and a well-drafted partnership agreement can help mitigate some of these risks and ensure a smooth operation.