Partnership

A partnership is formed out of two or more legal entities. These legal entities can each be a sole proprietorship or a corporation, or a mixture of both.

There are two kinds of partnerships recognized throughout Canada. These are:

• General partnership

• Limited partnership

Some provinces also recognize limited liability partnerships (LLPs). However, these may be restricted to certain professions, usually regulated ones.

General partnership

With a general partnership, in theory, all partners have unlimited liability for any debts owed by their business. In practice, if the partners are corporations, their liability is usually limited to the corporation’s own assets. Creditors are not usually able to hold the corporation’s owners liable for its debts.

Limited partnership

With a limited partnership, there is at least one general partner with technically unlimited liability. Some or all of the other partners are limited partners. Their personal liability is limited to the extent of their investment in the partnership.

Limited liability partnership

With a limited liability partnership, all partners including general ones have their personal liability limited to some extent. The exact rules on this are set by the province.

Partnership and tax

Tax passes through the partnership to the partners. If the partners are sole proprietors, the income is considered standard personal income.

If the partners are corporations, they are subject to double taxation. In other words, the corporation itself pays corporate tax. Any money that is withdrawn from it is taxed again, usually as personal income.

Advantages and disadvantages of a partnership

In practical terms, the advantages and disadvantages of a partnership depend largely on the individual partnership agreement.

Realistically, a partnership is the standard business structure in certain business sectors. These tend to be highly regulated, knowledge-based sectors e.g. law. Outside of these sectors, the standard business structures are sole proprietorships and corporations.

Corporation

A corporation is a legal entity in its own right. It is owned by shareholders and managed by directors. It’s entirely possible for a corporation to have one shareholder who is also their one director. It’s also possible for a corporation to have multiple shareholders and multiple directors.

Technically, Canada recognizes five types of corporations. These are:

• Canadian-controlled private corporation (CCPC)

• Other private corporation

• Public corporation

• Corporation controlled by public corporation

• Other types of corporation

Practically, if you are a Canadian citizen opening a small business, be a CCPC if at all possible. If you are not a Canadian citizen but are opening a small business in Canada, be an ‘other private corporation’.

Corporations and tax

There are different tax rules for each type of corporation. What’s more, these can and do change. What is unlikely to change is the relative stringency of the rules.

In other words, a CCPC is likely to always get the most favourable tax treatment. This is because it is wholly owned by Canadian citizens and does business in Canada.

Other private corporations are likely always to have the next-gentlest treatment from the Canada Revenue Agency (CRA). This is because they still tend to be small businesses run in Canada.

The other three corporation types are likely to always have more stringent requirements. This is because these business structures are typically used for larger or more complex businesses.

Every corporation is subject to double taxation. In other words, the corporation itself is taxed on its income. When that income is withdrawn (e.g. to pay employees, directors or shareholders), it is taxed again.

Advantages and disadvantages of corporations

The specific advantages and disadvantages of corporations depend somewhat on the specific corporation structure used. There are some advantages and disadvantages of the corporate structure in general.

Advantages

• Owners (shareholders) can generally ring-fence their personal assets to stop them from being used to pay business debts.

• Ownership of a corporation can be adjusted fairly easily. For example, new owners can be added or old ones removed.

• A corporation can be sold in its entirety.

Disadvantages

• A corporation is more complex to set up than a sole proprietorship and, generally, partnerships.

• Tax-reporting requirements are more rigorous and more complex.

• The corporate structure means that income earned is subject to double taxation.

• Decision-making can become complicated and time-consuming.

A key point on personal liability

The protection from personal liability only applies provided that the individuals concerned have acted honestly and in good faith. It’s therefore highly advisable for directors of corporations to record not just their decisions but the thought process behind them. This can be useful protection if their decisions are later called into question.

Cooperative

A cooperative is essentially an association of members. The purpose of a cooperative is to meet the needs of these members as a whole. A cooperative is generally used for a non-profit enterprise such as a social enterprise. In principle, however, it can be used for a profit-making business.