Please keep in mind that this is not legal advice. The information provided herein is for educational purposes only. If you believe you require assistance in deciding which business structure is best for you, then you are encouraged to seek a professional.
In this article, I'll be discussing general partnerships, which can be distinguished from limited liability partnerships (discussed in another article)
Defined
Ontario's Partnership Act governs general partnerships. A general partnership is "the relation that subsists between persons carrying on a business in common with a view to profit". Here, the word "business" includes "every trade, occupation and profession". You may need to consult with a lawyer to determine if you're already involved in a partnership (without even realizing it!). In these situations, you may be subject to the Ontario's Partnership Act and other legislation.
Advantages
The partnership structure offers the advantage of having someone to brainstorm your cases with, share the expenses, and expand your database of clients. Partnerships typically generate a great deal more money than sole practices. The larger the law firm, the more likely it is that a practitioner will be handling large cases for large clients who generate large legal fees (see Judge William Huss, Start Your Own Law Firm: A guide to all the things they don't teach in law school about starting your own firm, (Illinois, U.S.A.: Sphinx Publishing, An Imprint of Sourcebooks, Inc., 2005), p. 14)
Felicia S. Folk points out the advantages of the general partnership in Getting Started: Opening Your Law Office (updated September 2004), Law Society of British Columbia, p. 6: online: Law Society of British Columbia:
* shared financial risk;
* continuity of cash flow when you are on vacation or ill;
* additional sources of capital and clients;
* broader management base;
* division of labour;
* ability to discuss all files with your partner;
* ability to provide clients with different areas of expertise; and
* sharing cost of associates and support staff.
Disadvantages
Felicia S. Folk points out the disadvantages of the general partnership in Getting Started: Opening Your Law Office (updated September 2004), Law Society of British Columbia, p. 6: online: Law Society of British Columbia:
* divided authority;
* hard to find suitable partners;
* conflicts among partners;
* liability for partners' actions; and
* less freedom to choose clients.
Ease of Creation
Ontario's Business Names Act provides that "[n]o persons associated in partnership shall carry on business or identify themselves to the public unless the firm name of the partnership is registered by all of the partners". In addition to registering the general partnership's name in the same manner as a sole proprietorship's, the partners will generally enter into a partnership agreement to modify the default rules prescribed by the Partnership Act. This partnership agreement will usually outline the relationship of the partners to each other and to third parties. The partnership agreement will also deal with issues such as "term of the agreement, names of the partners, who owns which of the assets, name of the partnership and who owns the name, capital contributions if any, how profits are to be shared, how the partnership is to be managed, how holidays and illnesses are to be handled, liabilities and disability insurance, admission and withdrawal of partners, how the partnership is to be run and conditions and mechanics for dissolution of the partnership" (Wendy E. Oughtred, Going It Alone: A Start Up Guide for the Sole Practitioner, (Aurora, Canada: Canada Law Book Inc., 1995), p. 51.)
The partners must also establish standards for fee distribution within the firm, including the means of rewarding lawyers for bringing business ot the firm, as well as the lawyers who actually work on cases (Judge William Huss, Start Your Own Law Firm: A guide to all the things they don't teach in law school about starting your own firm, (Illinois, U.S.A.: Sphinx Publishing, An Imprint of Sourcebooks, Inc., 2005), p. 18).
Continuity
Unless the partnership agreement provides otherwise, a general partnership can be dissolved in a number of ways, including:
* At the expiration of the partnership's term, adventure, or undertaking (if specified);
* By the death or insolvency of any of the partners;
* By the happening of an event which makes it illegal for the partnership to continue; and
* On application by a partner in respect of prescribed circumstances.
Liability
In a general partnership, all partners are jointly and severally responsible for the liabilities of the partnership up to the total value of their personal assets.
Taxation
A general partnership is a flow-through entity, which means that income earned by the partnership is passed onto the partners without being taxed at the partnership level. If a partnership earns dividend income, taxable capital gains, or realizes a business loss, these sources would be received as dividend income, taxable capital gains, or business losses in the hands of the partners. The income, losses, and tax credits of the firm is first determined and then allotted to the individual partners in accordance with their equity interest in the partnership (as per the partnership agreement). The income earned by the individual partners will be fully taxed at their personal income tax rate. The fiscal year end of the partnership will be same as the individual partners - namely, December 31st of each year.
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