STARTING A BUSINESS
WITH SOMEONE ELSE? CONSIDER A PARTNERSHIP !
You’ve decided to either start a new business
venture or buy an existing one with someone else. One thing that
you should look at is what sort of business entity you will be operating
your business through. If you and another person undertake a business
venture together you are faced with two possibilities – you
can either form a partnership or incorporate your business. It may
be helpful at the outset to consider the method of carrying on this
business with your accountant or lawyer, as it may help you and
your business down the road.
When two or more persons carry on a business together
with a view to profit, the relationship is called a partnership.
The partnership is like a sole proprietorship in that the partners
are carrying on the business themselves directly. In contrast, a
corporation is a separate legal entity from its shareholders. If
you choose this method of carrying on business you would be operating
the business through the corporation. This is significant, in that,
as a separate legal entity, any income or losses are taxed in the
hands of the corporation and not its shareholders. A partnership
is not a separate legal entity from that of its partners and, as
a result, the income or loss of the business carried on by the partnership
is allocated to each of the partners. If losses are created at the
start of carrying on a business (as they typically are) they flow
directly to the partners. The partners can then apply these losses
against his/her income from other sources of income. This provides
an advantage over a corporation in that a corporation can only use
losses against its income and not of its shareholders. In addition,
when a partnership business takes off, and the partners wish to
incorporate, a partnership can generally transfer its assets into
a corporation on a tax-free basis.
A partnership does have some disadvantages, however.
Under the Partnership Act, in the absence of any agreement between
the partners, a partnership is dissolved by the death or insolvency
of a partner. In addition, a partnership may be dissolved merely
by one partner giving notice to the other partners of his or her
intention to dissolve the partnership. As a result, a partnership
should have a written partnership agreement among all the partners
that accounts for the question of automatic termination of the partnership
and the withdrawal of partners.
A partner is also liable for all the liabilities
of the partnership. This is in contrast to a corporation where a
shareholder is not required to account for the liabilities of the
corporation. However, this may not be such a problem given that
most banks and loan companies ask a shareholder of a new business
to personally guarantee the debts and obligations of any loan. As
a result, this advantage may not be so critical for a new business.
A partnership may not be suitable for all types
of businesses. When making this decision you may wish to contact
a lawyer or accountant to discuss in detail which business vehicle
is appropriate for your business.
However, it may be worthwhile to give partnerships
a second look.
us at (416) 226-1163 or Toll Free: 1-888-380-0001