A partnership is similar to a proprietorship in that the business profits are taxed on the partners’ personal tax returns. The portion of profits to each one of the partners is dependent on the percentage of ownership.
How you set up your partnership will determine how the income and/or losses will be distributed.
We do not recommend partnerships, except in specific circumstances. Typically, we recommend small business owners to incorporate rather than set up a partnership.
Advantages:
- You and your partners can combine finances in order to invest more than either you could have done individually.
- Your partnership will most likely be able to borrow more than a sole proprietorship. This is because creditors will have the collateral of two or more people instead of only one to secure their lending.
- You and your partners can pool talents to accomplish more.
Disadvantages:
- Like a sole proprietorship, you and your partners are also exposed to unlimited liability incurred by the business.
- Your partnership ends every time a partner leaves, unless provided for in a partnership agreement.
- Start-up costs can be as high as, or even higher than, the cost of incorporating, due to the cost of Partnership Agreements.