If two people buy a business together, is it a sole proprietorship or a partnership?

Two people who buy a business together should check whether the law treats them as partners before choosing a structure. CRA describes business income as earned from a business you operate yourself as a sole proprietorship or with someone else as a partnership. In Ontario and British Columbia, the Partnership Acts decide when two people are partners. This page uses Ontario’s and British Columbia’s Acts, each as that province’s own; elsewhere, check the rules where you are.

The statutory test

Ontario’s Partnerships Act s.2 says partnership is the relation that subsists between persons carrying on a business in common with a view to profit. British Columbia’s Partnership Act uses essentially the same definition. The Ontario Act also says the members of an incorporated company are not a partnership within the meaning of that Act, which is why a corporation is the other structure two buyers may consider.

What points toward a partnership

Under Ontario’s Act, receiving a share of the profits of a business is proof, in the absence of evidence to the contrary, that the person is a partner, although the Act lists exceptions, such as a loan under a contract in writing, signed by or on behalf of all parties, that gives the lender interest varying with the profits or a share of them. Joint ownership or part ownership of property does not of itself create a partnership, whether or not the owners share any profits made by its use. So under the Act, owning assets together does not by itself make two buyers partners.

Putting it in writing

Ontario’s Act says partners’ mutual rights and duties, whether set by agreement or by the Act, may be varied by the consent of all the partners, and that, subject to any agreement express or implied between the partners, no one may be introduced as a partner without the consent of all existing partners. A written partnership agreement is one way to record those terms. CRA’s page points partnerships to the T5013 partnership information return and each person’s business income to Form T2125.

Questions to ask a lawyer

• Do we intend to carry on the business together, and how will profit be shared?
• Should we buy through a corporation instead, and what does that change for us?
• What happens if one of us wants out?

For splitting the purchase itself, see how to buy a business with a partner.