When a partnership makes sense for your small business.
The third and final article in our series on small business structures takes a closer look at business partnerships.
Whether you’re already running a successful operation or are just starting out, flying solo with a small business can be a lot of work. Blending your skills, resources and connections with those of a partner can potentially boost your business, but it’s important to understand precisely what’s involved and how best to form one before jumping into the partnership pool.
One of the first things to consider is your relationship with a prospective partner. Do you get along? Do you trust them? Since you will be working closely together, effective and regular communication is key to ensuring the business runs smoothly.
A partnership is established when two or more people pool their resources to operate a business. Each partner might contribute money, property, labour, skills and/or connections to the business. Partners each have a share in the management of the business, its assets and profits (or debts and losses). And there is no legal separation between the business and partners, which means that business debt claims can be made against the personal assets of each partner.
When it comes to income, an agreed-upon amount is allocated to each partner and is reported personally on each partner’s tax return. Just as with a sole proprietorship, business losses flow through to the partners, which can offset other income on their personal tax returns, lowering their taxable income. At tax time, the partnership itself only files an informational return rather than an income tax return.
The authority and responsibility of each partner, as well as how income will be allocated, can be outlined in a partnership agreement.
An agreement is critical
Each member of a partnership is held responsible for all business decisions, which means that you can be held financially responsible for your partner’s broken contract or other liabilities. Because of this, it is highly recommended that you put in place a written partnership agreement that clearly outlines the authority and responsibility of each partner.
Simply put, a partnership agreement sets out the rights and obligations of the partners. It helps to establish the financial contribution of each partner, the division of labour and how income will be allocated. An agreement also defines the partnership’s property, including real estate, equipment and intellectual property, and how banking, accounting and taxes will be handled. You can set out how disputes are resolved and what happens if a partner dies or simply wants out of the partnership. An agreement can also outline how the sale of the business will be handled.
Putting a clear and comprehensive partnership agreement in place will help your business operations run more smoothly, and can help avoid conflict, disputes and potential costly legal battles later on. It’s a good idea to consult a legal professional before you sign to make sure the agreement covers everything you need it to.
Is a partnership right for my business?
The ability to share resources and finances is a great reason to consider a partnership structure for your business. But before you make any final decisions, speak to your advisor to make sure you understand all the financial and tax implications of a partnership.
Your advisor can refer you to a team of specialists who can help you form a partnership and put an effective agreement in place.
You can easily register your partnership by visiting www.canada.ca/en/services/business/start/register-with-gov/registersole-prop-partner.html
Not all partnerships are created equally
Different types of partnership arrangements allocate liabilities differently.
This is the most common (and straightforward) type of partnership – each partner shares in the profits (or losses) and liabilities of the business.
More of a financial contributor, a limited partner is liable only for their contribution to the partnership and doesn’t get involved in the day-to-day business operations.
Limited liability partnership (LLP)
Unlike a general partner, an LLP partner is not liable for debts or liabilities due to negligence by another partner. This structure generally applies to higher-risk professionals such as doctors, lawyers and accountants, and provides its partners more protection.
More of a business undertaking than a partnership, a joint venture is when two or more participants pool their resources for a specific task. Each person involved is responsible for the profits, losses and costs of the venture, which is separate from their other business interests.
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