A partnership or general partnership is similar to a sole proprietorship except that the partnership must be registered with the provincial or territorial government as it is not possible to use the personal name of any one (1) owner. The partnership name should be properly cleared before commencing use of the name or you may be forced to change it resulting in significant additional expense, customer embarrassment and potential third party liability. Although the Ontario government, has a default set of information required to register a partnership it does not currently require a partnership agreement to be prepared or filed with the Ontario government. Although not legally required, it is prudent to prepare a partnership agreement, surprisingly even in a family business situation, as this can avoid disputes later on and/or assist in settling disputes should they arise. The default set of rules under the Ontario Partnerships Act are not comprehensive and may not regulate the partnership the way you intend. Consequently, you should consult a lawyer with a view to preparing a partnership agreement prior to any significant investment or activity (or possibly electing in favour of incorporation and the preparation of a shareholder agreement-discussed elsewhere in this article).

A more formal set of financial statements is typically prepared for a partnership as each partner’s percentage share of the gross revenues and expenses and net profit are reported on his or her individual tax return, and these numbers should correspond with the amounts declared by all of the other partners, failing which income tax audits may be triggered. Once again no special business tax returns are required and a summary of the partner’s portion of the income and expenses is reported in his or her own personal income tax return.

Once again deductions available only to corporations are not available to partnerships and individual partners. The biggest problem with a general partnership is once again that there is no limited liability to any of the partners. Worse still, regardless of any agreement between the partners each general partner is responsible for ALL of the liabilities of the partnership, not just the partner’s percentage share of the business. A partner may have an obligation to indemnify you for any amount paid out by you over and above his or her share of the partnership, if he or she has the resources to do so, but this will not affect your liability to third party creditors. Once again the two (2) major factors in favour of incorporation are limited liability and corporate tax treatment.