corporation and General Partnership: differences

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The corporation (inc.) and the general partnership (s.e.n.c.) both allow a business to be operated by several people, as shareholders or partners. There are several differences between these two types of business operations, both legally and fiscally. We offer you an overview of 3 major differences.

Legal personality and responsibility of members

The corporation constitutes a "legal person", with its own legal personality. This has the effect, with a few exceptions, of limiting the liability of its shareholders to their investment only. For example, generally speaking, a shareholder who has paid $100 for his or her shares cannot be required to pay more than that amount to satisfy the liabilities of the corporation of which he or she is a shareholder, unless he or she guarantees the corporation's obligations.

Although the partnership can contract in its own name, it is not a legal person, and its legal personality is incomplete. Like a sole proprietorship, the partners of a partnership are personally liable for the liabilities of the partnership.

Incorporation and organisation

The corporation requires, in order to be incorporated, the filing of articles of incorporation and the obtaining of a certificate of incorporation issued by the competent authority (Quebec Enterprise Register or Corporations Canada). The legal organization will then be done through resolutions of directors and shareholders. In general, the corporation is subject to a rather important formalism. The interest of each shareholder is measured by the number of shares he or she owns of the different classes of shares.

In contrast, a general partnership is formed by contract between the individual partners. A declaration of registration in the Register of Companies is required following the formation of the partnership. In this contract, the partners stipulate, among other things, the contributions that each of them promises to make to the company (in monetary form or otherwise), as well as the way in which the company's profits are to be shared. Unless otherwise specified in the partnership agreement, the partners have an equal share in the company. The shareholding of a partner may be expressed as a percentage or as a number of shares.

Income tax return

The corporation requires that a company-specific tax return be filed each year. The company is subject to a corporate tax rate, and will have to pay its own taxes on its profits. Where profits are distributed to shareholders in the form of a salary or dividend, the shareholder will also have to pay tax. These two levels of taxation allow the income tax liability to be deferred, as directors has absolute discretion over the timing of the distribution of corporate profits.

The partnership does not have a tax return. It acts as a tax conduit: each year the income and/or losses of the partnership are allocated to the partners, according to the terms of the partnership agreement. Therefore, no tax deferral is possible with the partnership.

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