How to setup a Partnership in Ontario, Canada?
Much like a sole proprietorship, a partnership is not a separate legal entity. A partnership arises from the legal relationship between two or more people that join forces to start a business. The partners do not have limited liability from creditors and personal assets could be seized. This has given arise to several different partnership structures, including General Partnerships, Limited Partnerships, and Limited Liability Partnerships; each of which has a different level of personal liability.
How to setup a general Partnership?
In a general partnership each partner is jointly and separately liable for the liabilities and obligations of the partnership. In this type of partnership, the partners do not have limited liability from creditors and personal assets could be at risk.
How to setup a Limited Partnership?
A limited partnership consists of a general and a limited partner. The limited partner has limited liability and only the initial investment is at risk to creditors. The general partner has unlimited liability.
How to setup a Limited Liability Partnership (LLP)?
A LLP is created under The Partnerships Act which allows certain professionals to practice under a LLP. The legislation states that the partner is not personally liable for any liabilities of the partnership that arise as a result of negligence by other partners of the LLP. The partners’ investment and the assets of the LLP can be at risk.
When setting up a partnership, do I need a partnership agreement?
Although a partnership agreement is not required by law, it’s a very good idea to have one in place. The partnership agreement would help avoid disputes among the partners in the future. The partnership agreement should include the following:
- General governing rules regarding the partnership
- How to add or remove partners
- What happens in case of death of a partner
- How to divide and distribute profits and losses
How is a partnership taxed?
A partnership is not a separate legal entity and does not file a separate tax return. The profits and losses flow directly to the partners, who report the income/losses on their personal tax return. A partnership could be required to file a T5013 Statement of Partnership Income depending on revenues and other criteria. A partnership calculates income and expenses in accordance with section 96(1) of the Income Tax Act which states that income and expenses have to be calculated at the partnership level.
A CRA business number for a partnership is not required. However, in certain circumstances you will be required to register a HST number. If you have employees you will be required to register a payroll number. All of which can be done over the phone by calling the CRA business line.
Contact our firm Cheema Chartered Professional Accountants for all your tax and accounting needs. We can help you minimize taxes and optimize profitability. We can help you setup the optimal structure for your partnership and help reduce future taxes. We are conveniently located in Mississauga and Brampton.Google+