Setting up your business can be very exciting.
It can also be stressful and require a lot of time and research to think everything through.
One of the most important decisions you’ll be making as you set up your business is how to structure it.
Consulting with our Markham accounting firm can be a great way to make sure you have all the facts you need to make your choice.
Here at Business Minding Services, we’re well versed in the various laws and regulations to consider.
We’ll provide you with professional business setup services on what options are best for you.
We’ve put together a series of articles on our blog that go over the different ways you can structure a business in Ontario to help you with your choice.
The first article in this series covered sole proprietorships.
This is the second, and will cover general partnerships.
What Is A General Partnership?
A general partnership business structure is largely what it sounds like.
At least two businesses, or individuals, come together to share the profits, liabilities, and assets, of the partnership business.
The businesses or people, come together as partners to share expertise and resources for the partnership business.
A general partnership can be a great way to structure business but does have a few advantages and disadvantages.
Below, we’ll go through a few key ones to consider.
Advantages Of A General Partnership
Structuring your business as a partnership does have its advantages.
We’ll take a look at five of them, below.
1. Two Heads Are Better Than One
Working with someone else means combining your experience, network, skills, and knowledge.
This can help you accomplish more than you can do on your own.
You and your business partner might have skills that complement each other.
As well, you can divide up tasks in a way that plays to both your strengths, saving time and effort.
You might also come from different backgrounds or cultures, and diversity in experience has been shown to improve a businesses innovation and profits.
This is because differences in experiences can lead to considering more factors or solving a problem in a unique way.
It can also help from a marketing perspective, since you can speak more effectively to multiple audiences.
You could do this with an operating partner as well, like if you hired a manager to operate a retail store.
However, they’ll be more dedicated if they have some skin in the game.
2. It’s Simple To Set Up
Similar to a sole proprietorship, a general partnership is on the simpler side to form.
General partnerships can be set up, by going through the formal procedures and drafting up the key documents to govern your business.
Of particular importance is a document describing the responsibilities of each partner.
It can also be cheaper to start compared to some other business types.
3. It’s Easier To Raise Capital (Compared To A Sole Proprietorship)
Since you have more than one owner in a general partnership, you have the resources and networks of each partner to tap into to raise business capital.
It can also be easier to borrow funds compared to a sole proprietorship.
After all, multiple owners will likely have a higher combined credit rating.
4. There’s Less Business Tax Liability
In a general partnership, partners pay personal income taxes on their share of the profit from the business.
As a result, this limits the income tax liability of the business.
5. You Can Convert It Into A Corporation Later
For many of the above reasons, you may decide to start your business as a general partnership.
However, there are some benefits to incorporating your business that general partnerships don’t have.
More on that in the next article.
But if you decide later that it’s best to organize your business as a corporation, it’s fairly easy to do so.
Disadvantages Of A Partnership
Now that you understand some advantages to a general partnership, it’s time to consider the disadvantages.
We describe five disadvantages to consider below.
1. It’s More Liable To Intra-Business Conflict
Sharing expertise and resources with another person can help the business.
However, you might also disagree on certain aspects of the business.
As a result, you might have to compromise on certain ideas.
A stressful season might also significantly strain your relationship with a business partner.
Overall, unlike a sole proprietorship, you don’t have complete control over all the business decisions.
2. It’s Harder To Raise Capital (Compared To A Corporation)
In a general partnership, the financial situation of a partner could discourage an investor from investing.
For example, a partner might have personal debt or taxation considerations.
That can be a turn off to potential investors.
So if you’re looking for options to help your business start, operate, and grow, you might need to look at a different structure.
3. There’s Greater Personal Liability
A general partnership is not a separate business entity from the partners.
As a result, you are still personally responsible for any business debt and liability.
This can lead to problems in particular if your partner makes irresponsible decisions.
For example, what if your business partner signs a contract that your business can’t fulfill?
In that case, you and your personal assets could still be held responsible, even though you didn’t personally sign it.
You might even be held fully responsible if your partner can’t be contacted.
In this way, general partnerships can cause significant personal liability.
That’s why it’s always important to very carefully consider your business partners.
4. You May Be Taxed At A Higher Rate
Partners in a general partnership are often considered self employed.
As a result, your net profit and losses from the company could be taxed at a self employment rate.
Depending on how well your business is doing, this tax rate might be higher than if the company was incorporated.
5. It’s Easier For One Partner To Dissolve
Since most general partnerships don’t allow a partner to transfer or divest from their interest in the company, this might lead to a partner leaving if their goals or priorities change.
It is also easy for a general partnership to dissolve if one person chooses to leave or dies.
This might be because the work dynamic no longer functions the same way, or there were only two partners.
If you have a partnership, it’s important to plan for such eventualities.
Otherwise, it may lead to instability in your business.
Which Option Is Best For You?
Whether you should structure your business as a general partnership, a sole proprietorship, or corporation depends on so many factors.
If you’re not sure which option is best for you, consulting an accountant is a good idea.
A business accountant can be a great way to get professional advice on the advantages and disadvantages to consider for your situation.
Accountants can also answer your questions about taxes, bookkeeping, and overall best practices for financial success.
Book Your Consultation With Our Accounting Firm Today
At Business Minding Services, our experienced accounting team would be happy to go through all your options with you.
From there, we can make a recommendation on how to best structure your business based on your personal circumstances.
From there, we can help you with income tax filings, accounting and bookkeeping, and much more.
Book your consultation with Business Minding Services today to find out how we can help you and your business.
