Partnerships FAQ

What is a partnership and how do I form one?

A partnership is a business owned by two or more people which is not a corporation.   You don't have to have a partnership agreement to create your partnership.  By law, the arrangement begins as soon as you start a business with another person.

Although it is not required by law, many partners work out the details of how they will manage their business in a written partnership agreement. If you don't create a written agreement, the partnership laws of your province or state will govern your partnership.

To learn more about partnerships and partnership agreements, read the free legal tutorial entitled Small Business Legal Structure, found in the Lean Law Library.  In addition, two forms of partnership agreements can be found in the Forms Store

Are there special rules for partnerships?

Unlike corporations, partnerships are relatively informal business structures. Partnerships aren't required to hold meetings, prepare minutes, elect officers or issue stock certificates. Generally, partners share equally in the management of the partnership and its profits and losses, and assume equal responsibility for its debts and liabilities. These and other details are typically described in a partnership agreement.

To learn more about partnerships and partnership agreements, read the free legal tutorial entitled Small Business Legal Structure, found in the Lean Law Library.  In addition, two forms of partnership agreements can be found in the Forms Store

Is a written partnership agreement necessary for all partnerships?

No.  Provincial or state law does not require partners to enter into a written partnership agreement, but it is smart to do so. If you don't enter into a partnership agreement, you run the risk that  your partnership will be governed by the default rules provided for by provincial or state partnership laws and which may govern your partnership in ways you and your partners had not intended.

Creating a written partnership agreement will also give you and your partners a chance to discuss your expectations of each other, define how each of you will participate in the business and help you work out any  issues before they become major problems.

You don't have to spend a lot of money on lawyer's fees to create a valid agreement.   You and your partners can easily put together a simple, clear agreement.

For more information, please read the free legal tutorial entitled Small Business Legal Structure and check out the Forms Store for sample partnership agreements.

How are partnerships taxed?

A partnership is not considered separate from its partners for tax purposes. The partnership itself does not pay any income taxes.  Instead, partnership income passes through the business to each partner and business losses and profits are reported on the partner's individual tax return.  Each partner will need to estimate the taxes he or she will owe at the end of the year and make four quarterly estimated tax payments to Revenue Canada.

Are partners personally liable for business debts?

Yes.  A partnership is legally inseparable from its owners. Each partner (with the exception of the limited partners in a limited partnership) is personally liable for the entire amount of any business obligations. If you form a partnership, creditors can come after your personal assets (such as your house or your car) to satisfy any partnership debts.

A partner is also legally bound by business transactions made by him or his partners and  can be held personally liable for those transactions. In contrast, owners of corporations are not personally liable for business debts.

For more information on partnerships, limited partnerships and corporations, please read the free legal tutorial entitled Small Business Legal Structure found in the Lean Law Library.

What happens if one partner wants to leave the partnership?

Before you go into business together, you and your partners should decide what will happen to the partnership when one partner retires or dies or wants to leave the partnership for some other reason.  To deal with these issues, it always makes sense to include "buy-sell" provisions in your partnership agreement.

What is the difference between a general partnership and a limited partnership?

A general partnership is one where all partners participate to some extent in the day-to-day management of the business. Limited partnerships are very different from general partnerships and are usually set up by companies that invest money in other businesses or real estate.

While limited partnerships have at least one general partner who controls the company's day-to-day operations and who is personally liable for business debts, they also have passive partners called limited partners. Limited partners contribute capital to the business (investment money) but have minimal control over daily business decisions or operations.

In return for giving up management power, a limited partner's personal liability is capped at the amount of his or her investment. That investment amount and no more would go toward paying off any partnership debts.  Personal assets of the limited partner cannot be touched.  This is called "limited liability."