A partnership arises when two or more persons are carrying on a business in common with a view to profit. A partnership benefits from low start up and compliance costs, but partners are jointly liable with other partners for the firms debts and obligations while they are a partner. This means that they are not only ultimately responsible for their own actions, but are responsible for the actions of their partners.

Ontario’s Partnerships Act contains the rules which govern the relationship and obligations between partners. However, many of these rules can be varied through a partnership agreement. The partnership agreement can deal with matters such as profit sharing, roles and responsibilities, the entry and exit of partners and the dissolution of the partnership. This allows a partnership to be a highly customized form of ownership.

For tax purposes, a partnership is a flow-through entity. This means that the partnership’s income is (i) calculated at the partnership level; (ii) allocated to each partner according to their share; and (iii) each partner’s share is taxed in their hands. Like a sole proprietorship, a partner’s share of the partnership income is combined with their income from other sources. This means that business losses can be used to offset a partner’s income from other sources. However, once a partnership becomes profitable, a partner will generally pay a higher rate of tax on their share of the partnership income than if the income was earned by a corporation.

We are experienced in drafting and reviewing partnership agreements. If you would discuss your partnership agreement with us, please call us to schedule a consultation.