A general partnership lets partners operate together without creating a legal person: simple and inexpensive ($461.24 all in), but the partners remain solidarily liable for the debts. A contract of partnership is strongly recommended.
The general partnership is appealing for its simplicity: two or more people pool their work, share the profits, and there is a business. But that simplicity has a price too many partners discover at the worst moment: each answers for the partnership’s debts out of their personal patrimony, including debts contracted by the others.
What a general partnership actually is
A general partnership is a partnership: a contract by which partners agree to carry on an activity together, in a spirit of cooperation, sharing the profits. Unlike a business corporation, it does not create a legal person truly distinct from its members. It must nonetheless be registered with the Québec enterprise registrar, carry a compliant name and file its updating declarations, like any enterprise.
For tax purposes the partnership pays no tax itself: its income is allocated to the partners, who report it on their personal returns according to their share. No deferral is therefore possible, unlike with a business corporation.
The real advantages
A general partnership costs little to create and to maintain. It gives a collaboration an official framework, with a business name, a Québec business number and a public existence in the register. It suits groups of professionals or self-employed workers who want to invoice under a common banner without the full corporate machinery. And its flow-through tax treatment can even be an advantage early on, when losses in the first years reduce the partners’ other income.
The risk that has to be faced
The partners’ liability is solidary for the obligations contracted for the service or the operation of the enterprise. In plain terms: if your partner signs a bad contract in the partnership’s name and disappears, the creditor can turn to you for the whole of it. Your house, your savings and your other personal assets are exposed, not only to your own decisions but to those of your partners.
That risk is managed, in part, by a well-drafted contract of partnership: who may bind the partnership, up to what amount, how profits and losses are shared, how a partner withdraws, how a disagreement gets settled. For a partnership this document plays the role the shareholder agreement plays for a corporation. Going without it means letting the Civil Code decide for you, with default rules rarely suited to your situation.
What actually changes between partnering in a general partnership and partnering in a business corporation.
| General partnership | Business corporation | |
|---|---|---|
| Setting up | Registration, contract of partnership recommended | Articles, legal organization, minute book |
| Liability for debts | The partners’ personal patrimony | Limited to the corporation, except suretyships and exceptions |
| A partner’s fault or commitment | Can bind the others | Binds the corporation |
| Imposition | Income allocated to each partner | Taxed in the corporation, then again on withdrawal |
| Tax deferral | Impossible | Possible |
| Losses in the early years | Reduce the partners’ other income | Stay in the corporation |
| Internal document to plan for | Contract of partnership | Shareholder agreement |
Depending on where you stand, three possible ways in.
Partnership or incorporation?
Our honest reading: the general partnership is an excellent starting vehicle for partners whose activity carries little risk of being sued or of running up debt, and who want to test their collaboration without heavy machinery. As soon as the business gains value, hires, borrows or exposes itself legally, the business corporation becomes almost always the better choice, for protecting the patrimony as much as for tax. The good news: the move from one to the other plans very well, and we regularly guide partners through that transition.
Who can bind the partnership, and how far
Here is the nuance that turns theoretical risk into real risk. You may perfectly well agree, in your contract of partnership, that your partner cannot bind the partnership beyond a certain amount without your consent. That limit protects you in your dealings with him.
It does not necessarily protect you against a third party in good faith. A supplier dealing with a partner acting in the ordinary course of the enterprise’s activities may, depending on the circumstances, rely on the apparent extent of that person’s authority. If the commitment proves disastrous, the recourse against the partner at fault exists, but it is exercised after the creditor has been paid, and it is worth only as much as that partner’s solvency.
The practical consequence is twofold. The contract of partnership must set clear internal limits, and certain restrictions must also be brought to the attention of important partners, which is done simply by specifying who signs what in major agreements. The real protection, though, remains the choice of partners: in a general partnership you are not only sharing profits, you are sharing an exposed patrimony.
The partner arriving, the partner leaving
Movements of partners are the second blind spot of this legal form.
The partner who joins an existing partnership should examine what they are joining. Liabilities contracted before their arrival do not disappear, and their exposure must be clarified in writing before joining, not after. A review of current commitments, leases, possible litigation and tax debts is the minimum, exactly as one would do before buying shares.
The partner who part often believes themselves released, wrongly. Their departure ends their future participation, but it does not automatically free them from obligations contracted while they were a partner. And until the register and the business partners have been informed, the appearance that they are still a partner can continue to have effects. A clean departure therefore takes three steps: a written agreement with the remaining partners, an update to the file at the register, and notice to the main creditors and clients.
Not becoming a partner without knowing it
A little-known and yet frequent point: a partnership can exist without any document having been signed. Québec law recognizes the partnership that arises from the conduct of the parties, where people carry on an activity together and share the profits in a spirit of cooperation.
Two tradespeople who have worked together for three years, sharing contracts and profits, without ever writing anything down, can be characterized as partners by a court seized of a claim. With, as a result, the liability that goes with that characterization. Informal collaboration, pooling of resources and sharing of revenue are therefore situations where the absence of a document does not mean the absence of consequences.
If your intention is to collaborate without going into partnership, say so in writing: a subcontract, a cost-sharing agreement or a simple document stating that each remains independent is worth far more than silence. This is one of the rare cases where a few paragraphs written at the outset avoid years of argument.
Moving from a partnership to a corporation
The transition is common and plans well, provided it is treated as a genuine transfer of a business rather than a formality. The assets must be transferred to the new corporation, the contracts assigned, the tax registrations redone, and the partnership’s registration radiée. The tax mechanism allowing the tax on accumulated gains to be deferred exists, but it must be properly documented: our article on incorporating an existing business sets out the full sequence.
This is also the moment to do what the partnership made less obvious: formalize the relationship between the partners in a shareholder agreement. Many partners discover on that occasion that they had never discussed what would happen if one of them wanted out. Better to have that conversation now than on the day it becomes urgent.
Frequently asked questions
Are the partners of a general partnership liable for the business’s debts?
Yes. The partners’ liability is solidary for the obligations contracted for the operation of the enterprise, including those contracted by another partner in the ordinary course. Each partner’s personal patrimony is therefore exposed.
Is a contract of partnership mandatory?
It is not required in order to register the partnership, but going without it means letting the Civil Code decide for you, with default rules rarely suited to your situation. It should set out who may bind the partnership, how profits and losses are shared, and how a partner withdraws.
Can you become a partner without having signed anything?
Yes. Québec law recognizes the partnership that arises from the conduct of the parties, where people carry on an activity together and share the profits in a spirit of cooperation. The liability that follows attaches to the characterization, not to the silence of the paperwork.