A partnership is cheaper and simpler: profits flow straight to the partners’ personal tax returns, but in a general partnership each partner is personally liable for all the business’s debts, including mistakes made by the other partner. A corporation costs more to set up and run, but it limits your personal liability and lets you keep profits in the company at a small business tax rate of about 11%. If you’re making more than you need to live on, or the business carries real risk, a corporation usually wins.
On this page
- Partnership vs Corporation: Which Is Better?
- Side-by-Side Comparison Table
- Liability: General Partnership, Limited Partnership and LLP vs Shareholders
- How Each Is Taxed (Flow-Through vs Corporate Rates)
- Setup Cost, Paperwork and Annual Filings
- Which Structure Fits Which Situation
- Moving From a Partnership to a Corporation
- FAQ: Partnership vs Corporation
- Choose and Set Up the Right Structure With Maxpro
Partnership vs Corporation: Which Is Better?
Choose a partnership if:
- You’re testing a business idea with a partner and profits are small
- Risk is low (no big contracts, debt or liability exposure)
- You’ll take out all the profit every year anyway
- You expect early losses and want to use them against your other income
Choose a corporation if:
- You’ll leave profit in the business to reinvest or save
- The business has liability risk: contracts, employees, leases, loans, customers on site
- You want to bring in investors or sell the business one day
- You want access to the $1.25 million lifetime capital gains exemption on a sale
Side-by-Side Comparison Table
| General partnership | Limited partnership (LP) | Corporation | |
| Legal entity | No, it’s the partners | No | Yes, separate from owners |
| Liability | Unlimited and shared | Limited for limited partners; unlimited for the general partner | Limited to your investment (in most cases) |
| Who pays tax | Each partner on their T1 (or T2 if a corporate partner) | Each partner | The corporation (T2), then shareholders on dividends or salary |
| Tax rate on business profit | Partners’ personal marginal rates (up to ~48% to 53.5%) | Same | ~11% on first $500K active business income (BC/AB), then 23% to 27% |
| Losses | Flow to partners’ personal returns | Flow to partners (limited) | Stay in the corporation |
| Setup cost | Low (register name, partnership agreement) | Moderate (legal setup) | Higher (incorporation, minute book) |
| Annual filings | Partners’ T1s, plus a T5013 in some cases | T5013 required | T2, financial statements, annual report |
| Raising money / selling | Hard | Possible | Easiest |
| LCGE on sale | No | No | Yes (qualifying shares) |
Liability: General Partnership, Limited Partnership and LLP vs Shareholders
General partnership: Every partner is jointly and severally liable for the partnership’s debts. If your partner signs a lease or makes a costly mistake, a creditor can come after your house and savings, not just your share.
Limited partnership (LP): Limited partners are only liable up to what they invested, as long as they don’t take part in managing the business. At least one general partner (often a corporation) has unlimited liability.
Limited liability partnership (LLP): Available only to certain regulated professions, such as lawyers and accountants. It protects partners from the professional negligence of other partners, but not from their own.
Corporation: Shareholders are generally only on the hook for what they put in.
Exceptions: personal guarantees you sign (banks and landlords often ask for them), unremitted payroll deductions and GST/HST (directors can be personally liable), and your own professional negligence.
How Each Is Taxed (Flow-Through vs Corporate Rates)
Partnership: The partnership calculates its income, but doesn’t pay tax itself. Each partner reports their share on their own return and pays tax at their personal rate, whether or not they took the money out.
Corporation: The corporation pays tax on its profit first. You pay personal tax only when you take money out as salary or dividends. The difference is deferral. Example: Two partners each earn $150,000 of business profit, and each needs only $90,000 to live on.
| Partnership | Corporation | |
| Tax on the $60,000 each partner doesn’t need (BC, approx.) | ~$21,000 each (marginal rates climbing from ~28% to ~41%) | ~$6,600 each (11% corporate rate) |
| Cash left to reinvest or save (per partner) | ~$39,000 | ~$53,400 |
The money left in the corporation is taxed again when paid out as dividends later, but in the meantime you have about $14,000 more per partner, per year working for you. If you need all the profit to live on, the tax difference mostly disappears and a corporation mainly adds liability protection.
Setup Cost, Paperwork and Annual Filings
| Partnership | Corporation | |
| Registration | Register a partnership name (BC or Alberta) | Incorporate (name report, articles, filing fees) |
| Typical setup cost | $100 to $300 + partnership agreement | $1,000 to $2,500 (with a professional) |
| Agreement | Partnership agreement (strongly recommended) | Articles, bylaws, and a shareholder agreement if 2+ owners |
| Bank account | Partnership account | Corporate account |
| Yearly tax returns | Each partner’s T1. Partnership return (T5013) if required | Corporate T2 plus each shareholder’s T1 |
| Yearly accounting cost | Lower | Higher (year-end financial statements and T2) |
| Government filings | Few | Annual report with the registry, minute book updates |
Related: T5013 partnership return · Cost to incorporate in BC
Which Structure Fits Which Situation
| Situation | Best fit |
| Two friends starting a side business, small profit | General partnership |
| Two contractors who need equipment, leases and employees | Corporation |
| Real estate investors pooling money, one managing partner | Limited partnership, or a corporation |
| Professionals (lawyers, accountants) | LLP, or professional corporations working together |
| Business partners who want to keep profit invested | Corporation |
| One partner wants out within a couple of years | Either, but a clear agreement is essential |
A common hybrid: each partner has their own corporation, and the corporations form the partnership. It combines limited liability with flexibility, but it’s more complex, and the small business deduction has to be shared.
Moving From a Partnership to a Corporation
You don’t have to sell everything and start again. Partnership assets can usually be moved into a corporation tax-deferred.
- Incorporate the new company.
- Value the partnership’s assets (equipment, inventory, goodwill).
- Transfer the assets to the corporation using a section 85 rollover (subsection 85(2) for partnerships), in exchange for shares.
- File the election (Form T2058 for a partnership transfer) on time.
- Wind up the partnership, transfer contracts, bank accounts, GST and payroll accounts, and notify suppliers and customers.
See: Section 85 rollover · Switching from sole proprietor to corporation
FAQ: Partnership vs Corporation
Do I need a written partnership agreement?
It’s not legally required, but you should have one. Without it, provincial partnership law decides how profits are split and what happens when someone leaves, often not the way you’d expect.
Is a partnership taxed twice?
No. A partnership isn’t taxed itself. Profit is taxed once, in the partners’ hands.
Can a corporation be a partner?
Yes. Corporations can be partners in a partnership, and this is a common structure.
Does a partnership need its own GST number?
Yes, if it has taxable sales over $30,000. The partnership registers for GST, not the individual partners.
Can I switch from partnership to corporation later?
Yes, usually tax-deferred with a section 85 rollover.
Which has lower accounting fees?
A partnership, usually. A corporation needs year-end financial statements and a T2 every year.
