Note: This article is provided for educational purposes only. This is NOT LEGAL ADVICE.
Partnership is a more sophisticated form of sole-proprietorship. There is no distinction between the business and the owners, called partners. The partners are personally liable for the business’ liabilities in the most part. The partners act as each other’s agents, and are bound by the decisions made by the other partners
Registration
There is no mandatory requirement to register a partnership, especially if the partnership consists of the names of the partners. If you are operating under a name that is different than the partners’ names, you are then required to register the name with the provincial government.
Liabilities
Very much like the owner of a sole-proprietorship business, there is no distinction in law between the business and the partners of a partnership.
For tax purposes, the earnings of the partnership will be divided at year-end, and the partners pay income tax on their incomes accordingly. In profitable partnerships, the high incomes often push the partners into the highest taxation bracket under the Income Tax Act.
As with sole proprietorship, the partners are personally liable for any liabilities incurred during the operation of the business, including business debts and damages or penalties as a result of a lawsuit.
What is more, the partners are agents of one another; business decisions made by one partner is binding on the rest. Therefore, it is very risky to form a partnership with someone you do not know or trust.
Partnership Agreement
Partnership agreements set out the rights and obligations between the partners. They may also spell out how earnings are shared at the year end, and what authority or decision-making power one partner has in the business.
The cost of a partnership agreement is high. This is because the partnership agreement must be tailor-made to each partnership’s concerns. After the partnership agreement has been drafted by the lawyer for the firm, the partners are nonetheless generally encouraged to seek their own independent legal advice. These factors push the cost up.
However, many small partnerships operate without a partnership agreement. In this case, the partnerships will be governed by the default rule under the Partnership Act.
