In Part 1 of this series, I briefly discussed the three ways that a business can be structured (sole proprietorship, partnership or corporation). I then took a closer look at the sole proprietorship in greater detail and set out some of its strengths and weaknesses.
In this second part of this series, I am going to further explore “the partnership”. I will discuss what constitutes a partnership, as well as set out some of the pros and cons of a partnership that you may want to consider when deciding whether a partnership is the right structure for your business.
A partnership is constituted when two or more individuals carry on business together with a view to profit. There are three types of partnerships currently recognized in Ontario, those being:
- General Partnerships (GP);
- Limited Partnerships (LP); and
- Limited Liability Partnerships (LLP).
What is the difference between these three types of partnerships?
In a general partnership, each partner’s liability for the obligations of the partnership is unlimited, whereas in a limited partnership that liability may be limited to the amount that the partner has contributed to the business. A limited liability partnership is a cross between a general partnership and a limited partnership; each partner is only liable for their own negligence.
What are the “pros” of a partnership?
- Initial start-up costs are low.
- Fairly simple way to set up your business with few legal formalities.
- You can share in the responsibility of running the partnership business while maintaining limited liability in limited partnerships and limited liability partnerships.
- The business’ capital losses can be used to offset the business’ capital gains (please contact your accountant for further information).
What are the “cons” of a partnership?
- Your business is not its own legal entity. Thus, the business and personal assets of a partner may be seized to satisfy a liability of the partnership. For example, if you own real property i.e. a house, and your business has incurred debt, your house can be seized to fulfill that business debt obligation.
- There is a risk of conflict amongst the partners regarding the management of the business itself.
Should you decide that a partnership is the right structure for your business, what are some other things you might want to consider?
- What terms should you include is your Partnership Agreement?
- How should you structure the partnership itself?
Stay tuned for the third and final part of this series where I will explore “the corporation” in further detail.
Disclaimer: A solicitor-client relationship is not established by viewing this article and will not be established until confirmed by the solicitor and client in writing. This article is not legal advice but legal information only, and cannot be relied upon for its completeness. If you have specific questions contact a lawyer in your jurisdiction.
Jennifer Wilowski is a lawyer licenced to practice law in the province of Ontario. She is a Partner and co-founder at Anton & Wilowski LLP, a general practice boutique law firm in Mississauga, Ontario. Her main areas of practice include Corporate Law, Real Estate Law, Wills & Estates Law, Civil Litigation and Cannabis Law.
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