Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to drafting, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements. I should know – I’m one of them and you can contact me directly.
In this blog, I’ll be discussing Limited Partnerships (or LPs) – specifically, what are they, how they are created, and liability issues for the general and limited partners.
What is an LP?
A limited partnership is a partnership governed by statute and any governing documents agreed to between the parties (e.g. limited partnership agreement). We begin our analysis with the Ontario Limited Partnerships Act. Section 3(1) of that Act states that a limited partnership must consist of at least one person who is a GENERAL partner and one person who is a LIMITED partner. And there can be more than one of each. A general partner is essentially like a partner in a general partnership, which I have blogged about extensively. They have all the rights and powers to manage and bind the limited partnership. Importantly, their liability is UNLIMITED. Think of a limited partner, on the other hand, kind of like a silent partner. They don’t get involved in controlling the business of the partnership and their liability is generally LIMITED to the value of money and other property which they contributed or agreed to contribute to the limited partnership: s. 9.
How do you create an LP?
Interestingly, unlike general partnerships (which can come into existence without the partners being aware or even specifically trying to avoid that relationship), a limited partnership can only come into existence “when a declaration is filed with the Registrar”: s. 2(2). So what about the liability of a limited partner until that happens? Well, until the declaration is filed and accepted by the Registrar, the partnership can only be characterized as a general partnership, which imposes UNLIMITED liability on the prospective limited partner.
Also worth mentioning is that you need to have a partnership before you can have a limited partnership. This means that the basic test for forming a partnership must exist at all times – namely, that one or more parties carry on business in common with a view to profit (see s. 3 of the Ontario Partnerships Act). In Backman v. R., [1997] T.C.J. No. 728, the Tax Court of Canada cited Pooley v, Driver (1876), 5 Ch. D. 460 and Stekel v. Ellice, [1973] 1 W.L.R. 191 to support the proposition that a “partnership” must exist under the Act in order to create a limited partnership in Ontario:
74 Therefore, the mere act of registration does not create a limited partnership. As one commentator has noted in the context of the Ontario Limited Partnerships Act:
While the Ontario legislation provides that a limited partnership is formed when a declaration is filed with the registrar in accordance with the legislation, this provision does not appear to dispense with underlying requirement that there be a partnership embodying a relationship between persons carrying on business with a view to profit. In other words, registration of a limited partnership will not of itself create the relationship of partnership. Registration simply confers limited liability in respect of the limited partners and renders the partnership subject to the additional provisions of the Act.
75 Members of a purported limited partnership must share a view to profit in order for their arrangement or relationship to be considered a partnership for the purposes of the Act.
When that case was appealed, the Federal Court of Appeal made the following comments about Alberta Limited Partnerships Act (which is akin to the Ontario Limited Partnerships Act):
52 However, I do not read these provisions as giving the limited partnership some type of existence independent of the requirement to comply with the definition of partnership.
53 I see nothing in the limited partnership provisions of Part 2 [of the Alberta Limited Partnerships Act] that renders the definition of partnership inapplicable to limited partnerships…
Renewal
Every 5 years, a limited partnership declaration must be renewed and payment (currently $210) must be made to the government. The renewal requires:
- that all general partners sign;
- that the limited partnership name be provided;
- that the address of the principal place of business in Ontario be provided; and
- that the general nature of the business be identified.
If the answer to these questions changes from the previous limited partnership declaration, then a declaration of change must be filed with the registrar.
Who cannot use a Limited Partnership?
In Ontario, professionals such as lawyers, doctors and accountants cannot use a limited partnership vehicle: they are prohibited from doing so. They can, however, form a professional corporation or a limited liability partnership – a discussion of which shall be reserved for another blog.
Partnership Name
A few things are worth mentioning here about the name of the limited partnership. First, if the partnership is going to operate under a business name other than the owner’s, then the business name must be registered under the Ontario Business Names Act. The appropriate form can be found here (for now). Second (VERY IMPORTANT): if the surname or a distinctive part of a corporate name of a limited partner is used in the limited partnership’s name, then “the limited partner is liable as a general partner to any creditor of the limited partnership who has extended credit without actual knowledge that the limited partner is not a general partner”: s. 6(2) of the Ontario Limited Partnerships Act.
{ 1 comment }
So, can you give a step-by-step approach to ppl who wish to form an investment company in ONTARIO by using an LP structure for the purpose of wealth creation by investing in publicly traded US and Canadian companies.
Thanks
Comments on this entry are closed.
{ 3 trackbacks }