Insights & advice
What is a general partnership?
May 2022 – 5 min read
Key takeaways
Along with incorporating a business or being a sole proprietor, a general partnership is 1 way of structuring a business in Canada.
A general partnership is a business that’s established with 2 or more owners (partners).
There are pros and cons to think about, along with tax implications, when deciding if a general partnership could be the right business structure for you.
What’s in this article?
An intro to forming a general partnership
Along with incorporating a business or being a sole proprietor, a general partnership is another way of structuring a business in Canada.
A partnership is an unincorporated business that’s established with 2 or more owners (partners). Each partner contributes money, labour and other skills to run the business in exchange for a share of its profits or losses.
Just like a sole proprietorship, a general partnership is relatively easy to set up. In fact, you may only need a verbal agreement to form a partnership, although most are set up by putting a written agreement in place that outlines the rules for how the business will be run. This could cover things like joining the business, how to divide income among partners, and the process for dissolving a partnership or leaving it.
A general partnership files an information return with the Canada Revenue Agency, but it’s not required to pay tax. Instead, each partner includes a share of their income or loss on a personal, corporate or trust tax return, and this is then taxed at personal income rates (or corporate rates in the case of corporate partners).
Benefits and drawbacks
| Benefits | Drawbacks |
|---|---|
| Setup costs are relatively low and can be split among partners. | Partners are jointly liable for all debts and liabilities, and if the business is sued, this could place personal assets at risk. |
| Partnerships have fewer reporting requirements, which mean less paperwork and admin. | Consensus must be reached for all business decisions, which may present challenges when it comes to issues that partners. |
| A more experienced partner may be able to provide guidance and mentorship to help a less experienced business partner. | Death and retirement don’t absolve partners from existing debts and other liabilities of the partnership. |
What’s next?
There are other things to consider when it comes to setting up your own business – for example, you may look at buying some personal health coverage to bridge the gap between what’s covered by provincial and territorial plans, and what you pay out of pocket.
If you’re not contributing to a workplace pension plan, you may look at setting up a registered retirement savings plan (RRSP) to help you put aside for the long-term.
One more key thing to think about is protecting your business and/or your business partners in the event something happened to you. Life insurance for your business can be personally or corporately owned, and provides a one-time, tax-free payout for your business if you die.
The information provided is accurate to the best of our knowledge as of the date of publication. This information is general in nature, and is intended for educational purposes only. The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.
