PARTNERSHIPS: Limited Partnerships (LP) vs. Limited Liability Partnerships (LLP)

Limited partnerships are formed to carry on any business that a general partnership can also do. Its principal feature is that the liability of each limited partner is limited to the amount of money or other property that partner contributes. According to the Limited Partnerships Act, a limited partner may contribute money or property to a limited partnership but not services or agrees to contribute to the limited partnership as stated in the record of limited partners that the limited partnership is required to maintain.

Formation

A declaration has to be filed with the Ministry of Government Services signed by all the general partners and stating, among other things, the firm’s name, the general nature of its business, the names and addresses of the general partners and the address of the principal place of business in Ontario of the limited partnership. Though a declaration expires every five years, it can be renewed by filing a new declaration before the expiry date. No change is effective for the purposes of the Limited Partnerships Act until a declaration of change is filed with the Registrar. Not only a limited partnership is subject to the provisions of the Limited Partnerships Act, but also to the Partnerships Act, the Business Names Act and the common law, to the extent that the latter three bodies of law are not inconsistent with the provisions of the Limited Partnerships Act. There has to be in a limited partnership one or more persons who are general partners and one or more persons who are limited partners. A person could be a general partner and a limited partner at the same time in the same limited partnership. Under the Limited Partnerships Act, a “person” is defined to include, among other things, an individual, a sole proprietorship and a corporation.

Characteristics

Basically a passive investor, the limited partner, is not an active participant in the operation of the limited partnership. Unless there is a limited partnership agreement, which gives priority to one or more limited partners as to profits, limited partners share the profits of the limited partnership in proportion to their contributions. If the payment of profits paid out to a limited partner or to a general partner would reduce the assets of the limited partnership to an amount that it is insufficient to discharge the liabilities of the limited partnership to persons who are not general or limited partners, then no such payments would be made (i.e. insolvency test). The limited partner is also permitted to loan money and transact business with the limited partnership, and will rank equally with general creditors in respect of claims arising from such loans or transactions.

In a limited partnership, a general partner has all the rights and powers and is subject to all the restrictions and liabilities of a partner in a partnership without limited partners. The general partners in a limited partnership require the consent or ratification of all limited partners for actions that fall within the categories listed in the Limited Partnerships Act, and this list could be augmented in a limited partnership agreement. Any individual, who is both a general partner and a limited partner in the same limited partnership, has the rights and powers, and is subject to the restrictions and liabilities of a general partner. With regard to the person’s contribution as a limited partner, the person has the same rights against the other partners as a limited partner. The general partner’s liability can only be unlimited, and becoming also a limited partner has no effect on this liability. Yet, a general partner could nevertheless wish to be a limited partner in order to participate with the limited partners in distributions of any profits.

Extra-provincial business

As there is no legislation regarding the status of a limited partnership organized in one province and carrying on business in another province, it is not clear whether the limited partners retain their limited liability in the latter province. In the Limited Partnerships Act, the provision is that no extra-provincial limited partnership shall carry on business in Ontario unless it has filed a declaration with the Registrar of Partnerships together with a power of attorney appointing an attorney in Ontario. Such an act ensures that there is someone in Ontario who may be served if a person in Ontario wishes to bring an action against the extra-provincial limited partnership. Without filing a declaration and a power of attorney, the extra-provincial limited partnership is incapable of maintaining an action or other proceeding in any court in Ontario.

Agreements

It is wise to have a written limited partnership agreement to deal with matters not addressed in either the Partnerships Act or the Limited Partnerships Act or with matters provided for in these statutes, which the partners desire to alter by agreement. If there is a carefully drawn agreement, it is possible to structure a limited partnership to achieve flexibility similar to that provided by a corporation, with provisions for the transferability of partnership interests or units and the admission of new limited partners. It is possible for a limited partnership with a minimally capitalized corporation as its only general partner to give all its participants the protection of limited liability offered by incorporation, if the corporation, and thus the limited partnership, is managed by persons who are not limited partners.

Limited Liability Partnerships

Essentially a mix of a general partnership and a limited partnership, the assets of an limited liability partnership (LLP) can be used to satisfy the debts of, and claims against, the LLP. In contrast to a general partnership, a judgment against an LLP for negligence will not be enforceable against the personal assets of all the partners. Excepting the partner who is negligent or who was negligent in supervising or controlling the employee who was negligent, no one else will have his or her personal assets exposed if the claim is successful. The Partnerships Act unambiguously states that a partner in an LLP is not a proper party to a proceeding by or against the LLP for the purpose of recovering damages or enforcing obligations arising out of the acts or omissions of the negligent partner.  A limited liability partnership is used when setting up a professional services firm where the individual partners are qualified professional services providers.  This allows for the assets of the LLP to be compromised first then the negligent partner.  This protects the other partners from the negligent acts or omissions of the other partners.  However, the assets of the entire LLP will always be at risk.

When thinking of how best to enjoy the flow through expense accounting benefits of a partnership enterprise together with the limited liability of a corporate entity, contact the lawyers at Levy Zavet PC to go over and design the best strategy to meet your needs.  Also, its not too late to get all the partners to sign a properly formulated partnership agreement before the disputes of exiting, entering, transferring and controlling the partnership arise.