When several people decide to go into business together, they can create a general partnership. Along with the business corporation, this is one of the legal structures used most often by business partners who want to operate a business together.
Compared to business corporations, a general partnership has the advantage of being a simpler legal structure that is cheaper to operate. This is the main reason why many business partners choose this structure to start a business.
In this article, Éducaloi explains the advantages and disadvantages of a general partnership as a legal structure for two or more people to start a business together.
Definition of General Partnership
A general partnership is the group of people (called "partners") who have decided to carry on a common activity. For a general partnership to exist, the partners must
- operate their business in a spirit of cooperation,
- share their knowledge, assets or activities, and
- share financial profits and losses.
A general partnership is created through a "partnership agreement". The partnership also needs a name. Also, in all contracts they sign, the partners must identify the partnership by its name, followed by the initials "s.e.n.c." An English general partnership name can use the initials "GP."
While a general partnership is not like an incorporated business corporation, it has a head office and a business name, and it can take legal action (it can sue and be sued). Also, the earnings of the general partnership are shared on a percentage basis decided by the partners.
Advantages of a General Partnership
Simpler than a business corporation
For two or more people to do business together, the general partnership is a simpler legal structure than a business corporation.
Less costly than a business corporation
It is a less costly, both in terms of setting it up and operating it (fewer government, lawyers', notaries' and accounting fees, etc.).
Some tax advantages
The partners have some tax advantages because money earned by the general partnership is considered to be their personal income. This means that:
- They can use tax credits reserved for individuals. For example, individuals get a credit based on a "basic personal amount" set by governments. This credit lets individuals reduce the taxes they must pay.
- The partners can use their business expenses to reduce the taxes they must pay (e.g., travel expenses, the cost of supplies.)
Sharing of resources among partners
Because the general partnership is operated by several persons, they can share resources with each other for the common benefit of the partnership, such as
- financial resources to pay the expenses of the business,
- business expertise and experience, and
- effort to develop the business.
To help each other in business, it can therefore be advantageous for two or more people working on their own to do business together as a general partnership.
Disadvantages of a General Partnership
A "partnership agreement" is required
The partnership agreement establishes the ground rules among partners. It provides for, among other things:
- the common goals
- the contribution to be made by each partner
- the percentages for sharing profits and losses
- the responsibilities of the partners
Depending on the complexity of their business activities, it might be necessary for the partners to consult a lawyer or a notary to draft the partnership agreement. Also, because they must all agree on the contents of the agreement before signing it, negotiating the various aspects of the agreement can be a time-consuming process.
Obligation to register
A general partnership's head office must be recorded in the Enterprise Register (French only). The partners must therefore complete all the formalities involved in registration (filing an initial declaration, name search and reservation of name, updating declarations, etc.).
The partners are personally responsible
Each partner in a general partnership is responsible for his actions and the actions of his partners. One partner could therefore be personally obliged to pay all the debts of the general partnership, even if he did not personally create any of those debts.
It is therefore important that each partner consider purchasing sufficient responsibility insurance, which is an expense. When the partners are professionals, they are usually required by law to have this insurance.
More taxes to pay if earnings are high
The general partnership itself does not have to pay tax. Each partner must declare, in his personal tax returns, the percentage of partnership earnings to which he is entitled.
Therefore, if the business generates high earnings, it might be a disadvantage to set up as a general partnership. Creating a business corporation may be the better option, since a corporation pays much lower taxes than an individual with high earnings.
The Decision to Incorporate
Partners who chose a general partnership to go into business together can later change their minds. They can decide to use one of the other legal structures available to them, in particular the business corporation (also called a "company"). To do so, the partners must "incorporate".
Often, people decide to incorporate when a business starts having earnings high enough to justify setting it up as a corporation. At this point, the advantages to incorporating (such as increasing the profits and reducing personal risks) outweigh the disadvantages (especially the cost and complexity).
To make it easier to move from a general partnership to a corporation, it is possible to use a "tax rollover?. This means that everything belonging to the general partnership is transferred to the corporation with minimal or even no taxes to be paid.
This article explains in a general way the law that applies in Quebec. This article is not a legal opinion or legal advice. To find out the specific rules for your situation, consult a lawyer or notary.