PARTNERSHIP BUSINESS

SUMMARY

Understanding the benefits and drawbacks of a partnership business can help

you determine is it's the right move for your endeavor.

There are many ways to form a business, each with its own distinct advantages
and drawbacks. In fact, there are four main types of business entities: a
partnership, a sole proprietorship, a corporation and a limited liability company.

A partnership business, by definition, consists of two or more people who

combine their resources to form a business and agree to share risks, profits and
losses. Common partnership business examples include law firms, physician
groups, real estate investment firms and accounting groups.

By comparison, a sole proprietorship puts all of those responsibilities on one

person, while a corporation operates as its own legal entity, separate from the
individuals who own it. A limited liability company, or LLC, is a hybrid of a
partnership and a corporation, allowing owners to take on profits and losses
without any personal liability or taxes on the business itself.

For many individuals, going into business with a partner is a chance to forge
experience, expertise and endeavors with others. To maximize some of these
benefits, it helps to understand exactly what a partnership business is.

Advantages and disadvantages of a partnership business

Understanding the pros and cons of forming a partnership business can better
inform you about how a business partnership works and help you decide
whether this is the most beneficial structure for your organization.

Advantages

 Stronger financial position. The ability to pool resources can provide

your business with more capital and access to new investors, while better
positioning the company to borrow money. Sharing business expenses with
your partners can help you save more than you might have on your own.
 Brain trust. Being able to share skills and institutional knowledge is a key
benefit of a business partnership. This can help broaden your expertise and the
versatility of your business.
 A broader network. By sharing contacts and connections with your
business partners, you can develop new relationships and expand your
professional network.
 Fresh eyes. Bringing in partners can provide new perspectives on how
you do business by seeing things from a different angle. Partners can offer
fresh ideas, market strategies and inspiration to grow your business.
 Tax savings. If your business is set up as a general partnership, your
company may not need to pay income taxes. In Canada, a partnership by itself
does not pay income tax on its operating results and does not file a tax return.
Instead each partner includes a share of the partnership income or loss on a
personal, corporate or trust income tax return.1
Disadvantages

 Liability. The primary drawback of a partnership is that all partners share

losses, debt and risk, and are fully liable for the financial obligations of the
business. This means creditors can seize any partner's personal assets if these
obligations are not met.
 Loss of full control. Sole proprietors who are used to doing everything
their own way might be in for a bit of an adjustment when switching to a
partnership business. Partners share decision-making and may need to
compromise when they can't agree.
 Potential for conflict. Having more than one person making business
decisions creates the potential for differences of opinion that can lead to
conflict. Partners may also become bitter if they feel like one person isn't
contributing his or her fair share.
 Difficult to sell. A partner cannot sell a business without the consent of
all of the other partners, potentially creating a stalemate when one of the
owners is ready to leave.
 Risk of instability. Without a plan in place, one partner's death, illness or
withdrawal from the business may put the future of the company in jeopardy.

How to create a partnership business

Working with one or more partners can add complexity to setting up a business.
Following certain steps can help simplify the process.

 Select a partnership structure. There are three different kinds of

business partnerships:
1. General partnerships. The most common partnership type. By definition,
this consists of two or more individuals who share the business' profits and
losses, as well as day-to-day decisions.
2. Limited partnerships: Include both general and “silent" partners who are
not involved in day-to-day decision making and have limited liabilities based on
their financial contributions.
3. Limited liability partnership (LLP): All general partners can receive liability
protection.

 Choose partners and their roles. Find partners whom you trust, as this
decision will set the tone and terms of your business. Decide how much it will
cost to join the partnership, what percentage of the profits each partner will
receive and which roles and responsibilities each partner will have. Some
partners may contribute equity, or ownership share in the business, while others
might be salaried partners who are paid as employees.
 Name your business. Your partnership's name will offer a first
impression of your business. You may consider a name that accurately
represents the purpose of your partnership business, or one that incorporates
the names of your partners and any designations such as LLP. Remember to
do some research to make sure the name you choose is unique so you don't fall
prey to copyright violation.
 Register your partnership. In most parts of Canada, partnership
businesses must register their names with the province in which they plan to
operate. Registering will help make sure you are not using the same name as
an existing business. You will also need proof of this registration to open a
business bank account.
 Obtain a business identification number. Commercial partnerships in
Canada need to obtain a nine-digit Business Number from the Canada
Revenue Agency; this number also serves as the business Tax Identification
Number (TIN). If you plan to do any business in the United States, you will also
need to obtain an Employer Identification Number from the U.S. Internal
Revenue Service (IRS).
 Create a partnership agreement. After you and your partners agree to
their roles and responsibilities, get everything in writing. An attorney can help
you draft a business partnership agreement form to detail provisions such as
each partner's rights and duties, financial obligations, profit distribution,
ownership, dispute resolution, confidentiality and an exit strategy.
 Secure necessary licenses and permits. Partnerships must comply with
federal, provincial and municipal business laws and regulations. Local
governments may require you to obtain a business permit or license to operate.
You may also need specialty licenses to sell goods, such as alcohol, food or
cigarettes, or to operate a specialized business such as an amusement park or
transportation service. If your business will collect retail sales tax in Canada,
you must register with your province to obtain a vendor's permit and follow the
provincial tax remittance schedule. You may also need to register to collect the
Goods and Services/Harmonized Sales Tax as a partnership and obtain a
GST/HST number from the Canada Revenue Agency.

Business partnership agreement

A business partnership agreement is a written contract between partners that
specifies their obligations and contributions to the business, as well as other
conditions of their relationship. Every business partnership agreement form
should detail these clauses:

 Who makes decisions Determine how you will make important decisions

and what to do when partners disagree.
 Percentage of ownership. It's important to calculate and make clear how
much of the business each partner owns. Also indicate how much money each
contributed to join the business, and what should happen if the business needs
more money to operate.
 Profits and losses. Set a formula for how partners will share earnings as
well as losses.
 Exit strategies. Come up with contingency plans for what should happen
if a partner dies, becomes disabled or wants to leave the company.

Does a partnership business make sense for your company?

Before you decide whether a partnership is the ideal business type for your
organization, consult with an outside expert and carefully consider the following:

 Legal liability. How much liability is ownership willing to take on? If you

are adequately insured and can afford to put your personal assets at risk, then
the financial gains that a partnership can offer might be worth it.
 Taxes. Choosing a business type can depend on where you want the tax
burden to fall. A partnership business itself does not pay taxes, meaning profits
and deductions pass through to the individual partners, who then report these
items on their personal income taxes.
 Long-term plans. Look ahead to what might happen to the business in
the future. In a partnership business, it's important to consider who will take
over the business after the founding partners are no longer involved.
 Costs. Although corporations offer strong liability protection, they require
more extensive record-keeping and reporting, thus incurring higher
administrative costs than other business entities. They are also the most
expensive business type to form, making partnerships a more attractive option.
 Freedom. The business structure you choose can dictate how much
flexibility, administrative responsibilities and decision-making power you will
have. Corporations tend to be the most constricting in these areas. If you're
looking for more freedom, less bureaucracy and the authority to call the shots,
then a sole proprietorship might be the right choice for you.