Let’s look at the question of “what is a business partnership”. There is a lot of information to know before entering into a business partnership. As I discussed in my first article about partnerships you need to consult with a lawyer and have them write your partnership agreement. Please read my previous article if you have questions about what is involved in a partnership agreement.
Partnerships have a limited life. Meaning that when a partner withdraws from the business or passes away that the partnership dissolves and the books need to be closed. If the remaining partners wish to continue the business they must form a new partnership (with a newly written partnership agreement) and carry on.
Another aspect to consider before entering a business partnership is that of mutual agency. In the simplest terms, this means that any partner in the business can bind the business to a contract as long as it is within the regular scope of business activities. This means that the partners need to trust each others business skills. Things can take a turn for the worst if you have a renegade partner.
Partnerships also have unlimited personal liability in regards to the debts of the business. If you and your partners cannot pay off business debt with business assets then your creditors have the right to come after you and your partners’ personal assets. I I will get further into this in a later article as there are some exceptions. It serves to remind you that choosing a business partner should be done carefully.
Any cash, inventory, equipment, machinery, or computers (otherwise known as assets) that you or your partner(s) invest in the business turns into joint property of all partners. The partner who invests is no longer the only owner of the investment.
In Canada, a partnership does not pay business tax to the CRA (Canada Revenue Agency). The business would take any net income, or loss, and divide it between the partners per the partnership agreement. The partners will then pay personal income tax, individually, on their portion of the net income.
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I hope I have given you more to think about, and given you more knowledge of a business partnership. In my next article I will explain the different types of partnerships you can enter in to. Please let me know if you have a comment or question.