Short answer: A sole proprietorship has one owner and one tax return. A partnership has two or more, and the profit is divided and taxed in each partner’s own hands rather than in the business. Neither is a separate legal person, so in both cases the owners are personally liable. The real decision is usually not between these two. It is whether the arrangement has outgrown both.
| Sole proprietorship | General partnership | |
|---|---|---|
| Owners | One | Two or more |
| How it is formed | By starting to trade | By conduct — no agreement required |
| Separate legal person | No | No |
| Who pays the income tax | The owner, personally | Each partner, on their allocated share |
| Tax on undrawn profit | Yes — profit is taxed whether drawn or not | Yes, an allocation is taxable without a draw |
| Liability | The owner’s own obligations | Each partner exposed to the others’ acts |
| Extra records needed | Business records only | Profit shares and each partner’s capital account |
| Possible extra filing | None | T5013 information return, if the tests are met |
| Ends when | The owner stops | A partner leaves, unless agreed otherwise |
On this page
What a sole proprietor and a partnership actually are
A sole proprietorship is really no structure at all. You are the business: its income and debts are yours. Beyond a business name and any activity licences, nothing is registered.
A partnership is two or more people carrying on business together with a view to profit. No agreement, registration or intent is needed. If the facts fit, you are partners, often discovered only in a dispute.
Neither is a separate legal person. That is the fact that drives almost everything below: a corporation stands between the owner and the business, and neither of these does.
How the tax actually works
A sole proprietor reports business income on their personal return. There is no separate return for the business and no separate tax rate — the profit is simply added to the owner’s other income and taxed at their personal rates.
A partnership computes its income and allocates it to the partners, who report it personally; the partnership pays no income tax. An allocation is taxable even if no cash was drawn, so a partner can owe tax on profit still in the bank.
Because the profit lands on personal returns in both cases, neither structure lets you leave earnings in the business at corporate rates. That is the main tax argument for incorporating, and it applies equally against both.
Related: Should you incorporate in BC or stay a sole proprietor?.
Liability, and why partnership is the riskier of the two
A sole proprietor is liable for their own business obligations. That is a known risk and it is bounded by what they themselves do.
In a general partnership, each partner is liable for the partnership’s obligations, including those another partner creates. One partner can commit the firm to a contract or create a liability through their work, and the other carries a share of it.
This is not a theoretical concern, and it is the reason a partnership deserves more caution than its informality suggests. Where the work carries real professional or financial risk, this asymmetry is usually the argument that ends the discussion in favour of incorporating.
The filing and record-keeping difference
A sole proprietor keeps business records and reports the result. The administrative load is genuinely light.
A partnership must also track each partner’s share and capital account — what they put in, took out and were allocated. Without it, you cannot answer the question that matters when the partnership ends: who is owed what.
Some partnerships also have to file a T5013 information return, depending on the partnership’s size and the type of partners it has. It reports the allocation rather than paying tax. Whether it applies to a given partnership is a question of the specific tests — the T5013 page covers what it involves.
The agreement you should have, and usually do not
Because a partnership forms without paperwork, most start without an agreement. The default rules then decide things nobody discussed, and they rarely decide them the way the partners assumed.
Put these in writing: the profit split and whether it can change; what happens if one partner works less; how a partner exits and their share is valued; who can commit the firm; and what happens on death, divorce or inability to work.
Every one of those is cheap to agree at the start and expensive to argue about later. If a partnership is already operating without an agreement, that is the gap to close first — before the structure question.
When the answer is really "neither"
Most owners comparing these two are really deciding whether to incorporate. A corporation puts a separate legal person between owners and business, addressing liability, and lets earnings stay in the company instead of all landing on personal returns.
It also costs more and adds obligations. The real test: does the business earn more than the owners need to live on, and does the work carry risk worth separating from personal assets?
Sole proprietor vs corporation works through that comparison directly, and it is usually the more useful one for two people already working together.
Questions people ask
Can a partnership exist if we never signed anything?
Yes. A partnership is two or more people carrying on business together with a view to profit, and it is formed by conduct. No agreement, registration or intention to form one is required. People usually discover this during a dispute rather than before it.
Does the partnership pay its own tax?
No. It computes income and allocates it to the partners, who each report their share personally. The partnership itself pays no income tax, though it may still have to file a T5013 information return.
Can I be taxed on money I never took out?
Yes, and this catches people. Your allocated share is taxable whether or not you drew any cash, so a partner can owe tax on profit still sitting in the business account. Plan draws with that in mind.
Am I responsible for what my partner does?
In a general partnership, largely yes. Each partner can bind the partnership, and each is exposed to obligations the others create. That exposure is the main reason to consider incorporating where the work carries real risk.
Do we split profit 50/50 by default?
Absent an agreement, default rules decide it, and they may not match what the partners assumed — particularly where one contributed more capital or does more of the work. Settle the split in writing rather than relying on the default.
Should we just incorporate instead?
Often that is the real question. A corporation is a separate legal person, which addresses the liability exposure, and it allows profit to be retained rather than landing entirely on personal returns. It also costs more to run. Sole proprietor vs corporation works through that trade-off.
General information, not tax advice. This compares two operating models in general terms and cannot account for your circumstances. Speak to a CPA before acting — send an enquiry.