Business Structures 101

I want to introduce you to Amy and Jessica.

Amy and Jessica decide they want to start a new business venture together – they are going to open up a yoga studio. They sit down and decide how they are going to split profits and pay for expenses. They register a name “A&J Yoga Studio” with the provincial corporate registry office. Both of their names are on the lease for the studio space. They open up a joint bank account to track income and expenses.

Amy and Jessica appear to have a “partnership”. Let’s explore a bit more about what it means to have a partnership.

What is a partnership?

A partnership is defined at law as two or more people coming together to run a business with a view to making a profit.

Each province in Canada has a piece of legislation governing partnerships. If the partners of the partnership have not created their own legal agreement, then the legislation sets out the rules and regulations for their relationship.

Each partner owns an “interest” in the partnership. This interest may be represented by “units” (which similar to “shares” in a corporation).

Whether or not a partnership exists is a question of fact and law. Just because two parties are sharing profits, it does not necessarily mean that they have a partnership. In addition, partnerships do not necessarily have to be registered at the provincial corporate registry office.

How is a partnership taxed?

A partnership is similar to dropping a coin through a paper towel roll. Whatever goes in one side, falls right out the other. We sometimes call this a “flow through” entity for tax purposes.

The partnership itself is not taxed. All of the income and expenses of the partnership flow through to the individual partners and are reported on the individual tax returns of the partner. Each individual partner would use the Form T2125 Statement of Business or Professional Activities to outline their revenue and expenses.

In certain circumstances, a partnership will have to submit a Form T5103 Form to Canada Revenue Agency. However, this is only required when the partnership exceeds certain revenue and/or asset thresholds.

Depending on the nature of the business, the partnership may also need to file GST/HST and/or PST returns. For more information on this issue, please see Season 2, Episode 3 of The Tax Chick Podcast (featuring special guest, Jordan Brown of Lift Accounting) – we break down the basics of sales taxes in Canada.

What are the advantages and disadvantages to a partnership structure?

Here are some of the pros and cons of choosing to operate your business as a partnership:

PROS

It is a more formal structure that is governed by rules and regulations set out in legislation.

But even though there is applicable legislation, the partners of a partnership can still enter into their own form of agreement setting out the terms of the relationship.

Unless the partnership business exceeds certain thresholds, there is no separate income tax return required.

CONS

It is more complex than operating a business on your own as a sole proprietor.

It will be important to properly document the beginning and the wind-up of the partnership arrangement. Professional assistance should be sought to ensure that the proper documentation has been completed.

Concluding Thoughts

There are many advantages to entering into a partnership structure. However, as with any business relationship, it is important to document the terms and conditions of the relationship at the front end – especially, if you are entering into a business arrangement with a close friend or family member. Look out for more information on this topic in a future article!

If you would like to hear more on this topic, I encourage you to listen to Season 1 Episode 4 of The Tax Chick Podcast, “A candid discussion on business structures”, with my guest Jared Pilon. In addition, if you are looking for some advice on bookkeeping, check out Season 1, Episode 1 of The Tax Chick Podcast, “Bookkeeping 101” with my guest Tasha Baier.

The information in this article is not legal advice. We encourage you to consult with your legal advisor for advice specific to you.