Similar to a sole proprietorship, a partnership is an unincorporated business. Although legally a partnership can be formed without any provincial or federal registration, in practice partners may be required to register a partnership and its business name in order to establish a workable business arrangement. Limited partnerships are required to file a declaration in order to create such a partnership.
A partnership is not a legal person. Instead, it is a relationship that exists between partners who carry on business in common with the view to profit. The terms of the partnership may be established by verbal agreement. However, as a prudent business practice a written agreement is highly recommended. For example, a partnership agreement should outline the distribution of profits, gains and allocation of losses, if any, as well as various business issues such as what would happen in the event of a disagreement between partners or if a partner wants to leave or retire from the partnership. In the absence of an agreement or if the agreement is lacking, provincial laws may determine some or all of the terms of the partnership.
For Canadian tax purposes, a partnership is considered to be a person resident in Canada, but only for the sole purpose of determining profits and losses as allocable to its Canadian resident partners. Although a partnership is required to annually file a partnership information return with the Canada Revenue Agency, the partnership is not a taxpayer and does not pay income or any other taxes in its own name. Each partner is responsible to include the amount of profits and gains allocated to them by the partnership in their income. Each partner also should pay income taxes in respect of his share of partnership income and gains, whether or not distributed by the partnership.
To reduce personal liability, consider establishing a Limited Partnership. Limited partners who do not participate in the management will generally have personal liability limited to the amount of capital contributed to the partnership. However, no further protection is afforded to general partners who participate in the management of the partnership business.
There are many other strategies to reduce the personal liability of partners. For example, current and future liabilities may be reduced by using a special purposes entity which performs the functions of a general or managing partner.
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