When you form a small business, choosing the most appropriate business structure is vital, since it can affect your tax liability significantly. If you already have partners in your business, it’s likely you want to choose from one of the three legal partnership structures available in Canada: general partnerships, limited partnerships, and limited liability partnerships. The difference between the three rests primarily in the amount of liability the partners carry, either separately or together.
Most business partnerships in Canada are general partnerships, perhaps because this type is typically the easiest to set up. In a general partnership, you and your partner(s) share the business profits and debts equally. This means you are fully responsible for all your company’s debts, just as you would be if you had no partners and had formed a sole proprietorship on your own. You’re also fully responsible for all contractual obligations of your business. If you fail to pay debts or meet those obligations, your business can be sued, and you can also be sued individually.
Limited partnerships are more complex than general partnerships, but they do provide a way to help limit liability. A limited partnership consists of a general partner plus one or more limited partners. The general partner is often a corporation. That’s because a corporation doesn’t have to deal with the same kinds of liability issues that you would face if you were a general partner, since it comes into the partnership with its own set of legal protections. As a limited partner in this kind of business structure, your liability to debts, lawsuits, and obligations is defined by the level of your involvement with the partnership.
Typically, limited partners aren’t involved in the day-to-day operations of the business. Their contribution is a financial one. Because of this, setting up a limited partnership can be an excellent way for a small business to raise money. If a limited partner starts to operate the business, it loses its liability status and may end up treated legally as if it was a general partner.
Limited Liability Partnerships
Limited liability partnerships, also known as LLPs, may sound similar to limited partnerships, but they’re a completely different structure. LLPs aren’t permitted in every Canadian province, and they’re fairly new in Canada in general; for instance, British Columbia didn’t allow LLPs till 2004. In an LLP, even the general partner has its liability limited in certain ways. If an LLP is sued, only the partner who had anything to do with the plaintiff or the subject of the lawsuit is at risk, while the assets of the partners who weren’t involved are protected from risk. LLPs vary from one province to another. For example, in Ontario, only accountants and lawyers can form LLPs, while in British Columbia, all types of businesses can take advantage of them.
The kind of partnership you’re allowed to set up depends on a combination of your industry and the province or territory in which your small business operates. Speak to your tax professionals and investigate the specific regulations for your location to determine which type of partnership is right for you.