Partnership vs. Corporation: Which is Right for You?

Choosing the right legal structure for your business is one of the most significant decisions entrepreneurs face. Both partnerships and corporations offer distinct advantages and limitations that can substantially impact your business operations, tax obligations, personal liability, and growth potential in Ontario.

Business Structure Overview: The Foundation of Your Business

Your choice of business structure establishes the legal framework for how your company operates, determining everything from tax treatment to management responsibilities and personal liability protection. Before exploring specific structures, consider these fundamental factors that should influence your decision:

Types of Partnerships in Ontario

Partnerships are business arrangements where two or more individuals or entities agree to share in the profits, losses, and management responsibilities. Ontario recognizes several types of partnerships, each with distinct characteristics:

1. General Partnerships

A general partnership is the most straightforward partnership structure governed by Ontario's Partnership Act. In this arrangement, all partners share in the management and are jointly and severally liable for the partnership's obligations.

Key Characteristics:

• Simple and inexpensive to establish
• Pass-through taxation (income flows directly to partners)
• Each partner has unlimited personal liability
• Equal management rights unless otherwise specified
• Minimal ongoing regulatory requirements

2. Limited Partnerships

Limited partnerships (LPs) consist of at least one general partner with unlimited liability and one or more limited partners whose liability is restricted to their investment. These are regulated under the Limited Partnerships Act (Ontario).

Key Characteristics:

• Limited partners have liability protection
• General partners maintain management control
• Pass-through taxation benefits
• Formal registration required with the Ontario Business Registry
• Limited partners cannot participate in management

3. Limited Liability Partnerships

Limited Liability Partnerships (LLPs) in Ontario are primarily available for certain professions like lawyers, accountants, and other regulated professionals. They provide liability protection for partners from the negligent acts of other partners.

Key Characteristics:

• Partners are protected from liability arising from other partners' negligence
• All partners can participate in management
• Pass-through taxation
• Registration and annual filings required
• Limited to certain professional services in Ontario

Corporation Structure and Key Features

Corporations are distinct legal entities separate from their shareholders, providing the strongest liability protection. In Ontario, corporations can be formed provincially under the Ontario Business Corporations Act (OBCA) or federally under the Canada Business Corporations Act (CBCA).

Core Features of Corporations

While corporations offer significant advantages, they also come with more formalities and compliance requirements:

• Required corporate record-keeping and minute books
• Regular director and shareholder meetings
• Annual corporate filings
• More complex tax returns and accounting
• Higher formation and maintenance costs

Direct Comparison: Partnership vs. Corporation

Tax Considerations in Ontario

Taxation often plays a crucial role in determining the most advantageous business structure. Here's how partnerships and corporations are taxed in Ontario:

Partnership Taxation

Partnerships are not taxable entities. Instead, income "flows through" to partners who report their share on personal tax returns:

• Partners pay personal income tax rates on their share of income
• Business losses can offset other income on personal returns
• Partnership files information return (T5013) but doesn't pay taxes
• Partners can take draws without additional tax consequences

Corporation Taxation

Corporations file their own tax returns and pay corporate tax:

• Small business tax rate of approximately 12.2% on first $500,000 of active business income (combined federal and Ontario rates)
• General corporate tax rate of approximately 26.5% on income above the small business limit
• Potential for dividend tax credit when distributing profits to shareholders
• Income splitting possibilities through strategic salary and dividend payments
• Tax deferral opportunities by retaining earnings in the corporation

Making Your Decision: When to Choose Each Structure

Partnership May Be Preferable When:

Corporation May Be Preferable When:

Common Misconceptions

Conclusion

The choice between partnership and corporation should be based on a thorough assessment of your business goals, risk tolerance, tax situation, and growth plans. While partnerships offer simplicity and operational flexibility, corporations provide stronger liability protection and potential tax planning advantages.

Many businesses begin as partnerships and later incorporate as they grow and face increased liability or complexity. The optimal structure for your business may also change over time as your operations evolve and tax laws are modified.

At TRUST LEGAL, we recommend consulting with both legal and accounting professionals before making this critical decision to ensure your business structure aligns with your short and long-term objectives. Our experienced business law team can help you navigate the nuances of Ontario partnership and corporate law to find the structure that best serves your specific circumstances.