General partnership
In Canada, two or more people can start a business as a general partnership. It is one of the three most common ways to structure a company, the other two being sole proprietorship and incorporation.
The owners of a general partnership can be individuals or corporations—or both. With no formal documents required, general partnerships are simple and inexpensive to create. All the company needs is a registered trade name, a registered tax number to pay applicable taxes and a bank account.
At the outset, partners should outline their respective powers, ownership shares and capital contribution, as well as the profit distribution and operating procedures for the business.
Why entrepreneurs choose general partnerships
The most common reasons to form a general partnership include:
- two or more people/corporations want to work together to earn and split a profit
- it’s easy to set up—a verbal agreement is all that’s required, legally (although it’s recommended that the partners create a written agreement that sets out the rules for dividing profits and entering or exiting the partnership)
- it makes it easier for two or more entrepreneurs to raise capital
- it’s less expensive to form and run than a limited liability partnership, which has certification costs and more complex tax requirements
- the tax responsibilities are simpler than a corporation’s—profits and losses are passed through to the owners, who report them on their individual tax returns
- it’s just as easy to dissolve a general partnership as it is to establish one
How do you register a general partnership in Canada?
You may choose to register your general partnership provincially or federally. In some provinces, you will automatically receive a federal business number, while in others you’ll need to register directly with the federal government. Registrations can be done online.
Generally if you’re earning more than $30,000 per year, you’ll also need to register for a GST/HST account. And if you hire employees, you’ll need a payroll account, as well.
Advantages and disadvantages of a general partnership
| Features | Pros and cons |
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Operations General partnership includes joint ownership with some formalities and moderate administration expenses. The owners pool their funds to raise capital. |
Decision-making can be cumbersome, with important decisions made by voting among partners. Smaller decisions may be made individually as long as others are informed. |
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Accounting Revenues, expenses and cash flow management are all tracked internally with additional outside support from other professional accountants. |
Public reporting is not required, but general-purpose financial information is needed to run the company and satisfy bankers, vendors, tax collectors, etc. |
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Taxation Each partner is taxed personally on his or her share of partnership income, so a tax return for the general partnership itself is not required. |
There are limits to what expenses can be deducted. Taxable income is subject to individual personal tax rates. |
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Legal Each partner is liable for all assets and liabilities of the partnership. |
If the company is sued, each partner’s personal assets can be seized to settle the claims. |
Does a general partnership need to incorporate?
A general partnership does not need to incorporate to function as a legal business. If it isn’t officially incorporated, it will operate with the same tax and legal obligations as a sole proprietorship, with the partners reporting profit and losses on their own individual tax forms.
Most general partnerships choose to incorporate if they want to:
- keep their personal assets separate from their business liabilities
- grow a larger business that they may sell someday
- take advantage of lower corporate tax rates
- raise a large amount of capital from investors who only invest in corporations
- borrow money for the business from financial institutions at lower interest rates
- be able to sell shares of their business
- keep money in the business to defer paying personal income tax
Like sole proprietorships, general partnerships don’t offer liability from losses. That means all owners will be held personally, legally and financially responsible for any contracts, assets and debts the business incurs.
What are the tax implications of a general partnership?
Owners of a general partnership in Canada must report their share of the profits and losses on their own T1 income tax and benefit returns. There is no separate tax return form for the business, unless the business earns more than $2 million or if other uncommon circumstances apply. Owners will pay tax at an overall tax rate based on their income.
Courtney Tummon, a manager in the Liaison Officer Section of the Compliance Programs Branch at the Canada Revenue Agency, recommends that general partnership owners determine how income and losses will be divided long before tax time.
“There are no hard and fast rules that require the income and losses to be equal between the partners. But it is a good practice to decide from the outset and remain consistent throughout the life of the partnership. For example, one partner shouldn’t claim 75% of the income one year and 25% the next,” she says.
Where to get tax advice as a general partnership?
Tummon advises that business owners can get customized information about their tax obligations via a free one-on-one visit with a CRA Liaison Officer.
“We want to help small business owners understand their tax obligations and answer questions so they can meet those obligations. Anything a business owner chooses to discuss with a liaison officer is 100% confidential and will not be shared with any other areas of the CRA or anyone else. A visit from a Liaison Officer will not result in being reassessed or audited,” she says.
What are the legal implications of starting a general partnership?
While a general partnership is simple to start and operate, there are some legal considerations to keep in mind.
The primary concern is that the decisions one partner makes on behalf of the business is binding for the other partner or partners. For example, if a partner agrees to purchase products or services from a supplier, the others will be responsible for that purchase and any defaults on payments.
As with sole proprietorships, general partnerships don’t offer liability protection from losses. That means all owners will be held personally, legally and financially responsible for any contracts, assets and debts the business incurs.
Each partner’s own personal assets may be seized to cover damages or unpaid business debts. The same goes for any physical or financial injury that one partner inflicts on a person or a company if it’s done during the course of running the partnership.
These risks underscore the importance of ensuring you choose business partners wisely.
Can a general partnership get a business loan?
Just like sole proprietorships, general partnerships are able to secure business loans and lines of credit if they can show proof that the business is registered with their provincial or federal government.
What's the difference between a limited partnership and a general partnership?
A limited partnership is similar to a general partnership, but it has partners who invest in the business and don’t involve themselves in the day-to-day operations.
Here are the four main characteristics that distinguish a limited partnership from a general partnership:
- It’s operated by a single general partner with unlimited liability, supported by other limited partners.
- The single general partner gets a bigger share of the earnings in exchange for increased contributions and risk.
- The limited partners contribute capital but cannot be involved in the company’s management.
- The liability of the limited partners is equal to the amount of capital they contribute.
In some provinces, limited partnerships are available only to groups of professionals such as lawyers, consultants or doctors. In others, they also apply to small businesses with high overhead and start-up costs, such as retail operations. Limited partners can provide capital to general partners to invest in inventory and secure lease agreements.
Similar to general partnerships, limited partnerships are relatively simple and inexpensive to form. Essential at the outset is a partnership agreement, which helps clarify management accountability, ownership and profit distribution.
How do you dissolve a general partnership?
Closing a general partnership is as straightforward as opening one. While you and your partner(s) will want to divide up any assets and address any losses, there are no legal obligations to manage beyond reporting on your tax return that you are no longer in business.
“If income has been reported on the T2125 Statement of Business Activities of a T1 tax return, there is a section that asks if this was the last year you were in business. If it is the last year in business, you would select ‘yes,’” says Tummon.
“You may also need to file forms associated with GST/HST or payroll to close or de-register those accounts.”
Is starting a general partnership right for your business?
Before getting into business with other people, you’ll need to carefully consider all the potential risks and rewards. It’s recommended that you talk long and hard about how the business will operate, the labour will be shared, and the profits and losses divided. Creating a business plan and drafting a written agreement at the onset is also a smart idea for budding partners.
This process will also help you determine whether you should incorporate your general partnership to take advantage of lower tax rates and other benefits—or keep things simple by operating as a sole proprietor.
When you take the time to do the research, you’ll know what’s best for your company.
Next step
Download our free business plan template to help you define who you are, describe your business and document how you plan on achieving profitability.