This is the second entry of Understanding Your Business Organization Options. For information on corporations and sole proprietorships, please see Understanding Your Business Organization Options I.

General Partnership

A general partnership is created when two or more people work together towards a common goal. Similar to a sole proprietorship, there is no separate personality between the business and its owners – the owners receive all of the profits, but also carry unlimited responsibility for all of the partnership’s liabilities and obligations. It is possible for a general partnership to be formed without a partnership agreement, in such circumstance the Ontario Partnerships Act, R.S.O. 1990, c. P.5 will govern the relationship between the partners. This Act can produce outcomes that some or all of the partners did not intend upon entering the partnership; for example section 24 of the Act states that all of the partners are prima facie (a raised presumption until disproved or rebutted) entitled to share equally in the partnerships profits, regardless of capital, time or expertise contributed. In order to protect your property and to avoid contentious business relationships, it is important to have a properly drafted and executed partnership agreement.

Limited Partnership

A limited partnership is similar to a general partnership, in that the general partners are responsible for the operation of the business and carry unlimited liability for the business’ liabilities and obligations. Limited partners are only liable for debts and obligations of the partnership to the extent of their contribution, but as a trade-off for this limited liability, they are not permitted to take part in the partnership’s management. If a limited partner does take part in management, they will immediately become personally liable for the entirety of the partnership’s debts and obligations. A limited partnership is a creature of statute, and thus is only formed once a declaration is filed with the Registrar, in accordance with section 3 of the Ontario Limited Partnerships Act R.S.O. 1990, c. L.16. Because of the increased complexity of limited partnerships, it is important to set out the rights, responsibilities and obligations of the partners in a limited partnership agreement, in addition to the filed declaration. Limited partnerships are also often used as tax planning vehicles.