Partnership

A general partnership is formed by two or more individuals who together carry on a business for profit. There are three basic steps to the formation of a partnership:

1. A registration of the partnership where required under provincial law.
2. The creation of a partnership agreement.
3. The transfer of capital from the individuals to the partnership.

The registration of a partnership name will allow you to pursue matters in court, if required. This could be important if there is a contract in the partnership name that you are trying to have enforced under law. Under the Partnership Act you must register your unincorporated business with the Registrar of Companies if you:

• are associated in a partnership for trading, manufacturing or mining purposes.
• are engaged in business for trading, manufacturing or mining purposes and are not associated in partnership with any other person or people, but use as your business name a name other than your own, or use in your business name your own name and some words or phrase that indicate more than one member is in the business (for example, "and Company", "and Associates").

Partnerships of six or more partners and all tax shelter partnerships must register with Revenue Canada to obtain a partnership identification number and file annual information returns.

The partnership agreement will provide the basis of understanding between the partners regarding their rights to share in profits and losses, the work for which the parties are responsible, continuity of the partnership where new partners are admitted or others withdraw, and what will happen should the partnership dissolve.

The Income Tax Act has provisions to allow the tax-free transfer of assets from an individual or a corporate partner to the partnership.

General partners are not protected from claims of creditors as they are jointly and severally liable for the debts of a general partnership.

Another form of partnership is the limited partnership in which there is a general partner along with limited partners. Typically, the limited partners will contribute capital and share in the profits of the business. The expression 'limited' means the partners are only subject to losses and liabilities to the extent of their invested capital. Limited partners cannot be involved in the management of the partnership.

The net profits of the partnership are allocated among the partners based on their right to share income. A partner's share of profit or loss is reported on the income tax return for the year that includes the year-end of the partnership.