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Starting a business can be a daunting process and more so when we realize all the different ways that a business can be structured. The common ways that a business can be started include a Sole Proprietorship or an Incorporation.

But What About Partnerships?

General Partnerships allow for an unlimited amount of liability for those engaging in the business.

Limited Partnerships on the other hand can help reduce the liability that each Limited Partner is exposed to by limiting exposure to the initial amount contributed or a percentage of the limited partners interest based upon the amount contributed. Each Limited Partner is not liable for debts, obligations, or liabilities of the partnership or other partners arising out of negligence or other issues of another partner, employee, etc.

Unlike General Partnerships, Limited Partnerships do not come into existence simply by virtue of carrying on business.

The Components of Creating a Limited Partnership Are as Follows:

1. A Declaration must be filed with the Ministry of Ontario Registrar.

• The Declaration expires after five years unless renewed.
• Expiry of the Declaration does not terminate the Limited Partnership, however an additional fee must be paid for the renewal period.

2. A Limited Partnership Agreement (LPA).

• An LPA is not a requirement as the legislation has otherwise several bare standards in place, however an LPA can help to incorporate some of the finer terms of the partnership.

How Are Limited Partnerships Operated? 

By way of:

1. A General Partner with unlimited liability; and
2. Limited Partners in a supporting capacity.

The General Partner sometimes gets a bigger share of the earnings in exchange for increased contributions and risk. The General Partner makes the important decisions and keeps the Limited Partners informed.

A Limited Partner’s interest is transferable, but the transferee has the full rights of the transferor. The transfer can only be affected if all partners consent, or the transfer is in accordance with the LPA.

Advantages of Limited Partnerships:

1. The Limited Partnership does not have a separate legal existence.
2. A Limited Partnership is a private form of business where accounting is managed internally, public reporting is not required, and it allows for taxation of each of the Limited Partners rather than the partnership as a whole.
3. One of the most common reasons for investing in Limited Partnerships is to receive a share of tax losses generated by the Limited Partnership business. Sharing losses may be very attractive to individuals with high incomes from other sources. The losses will be deductible against that income, with the effect of reducing the individuals overall tax liability.

We encourage you to seek the advice of a tax professional to ensure that you are maximizing your tax efficiency if you are able. At Kormans LLP, we can assist your business by drafting and filing the Limited Partnership Declarations together with preparation of an LPA.

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Imdad Junejo is an Associate Lawyer at Kormans LLP. You can reach Imdad at ijunejo@kormans.ca. The information and comments herein are for the general information of the reader and are not intended as advice or opinion to be relied upon in relation to any particular circumstances. For particular application of the law to specific situations, the reader should seek professional advice. Kormans LLP cannot be responsible for the content of other sites. We expressly disclaim all liability with respect to actions taken or actions not taken based on content received from a third party website linked, directly or indirectly, to that of Kormans LLP.  The link to another site is not to be construed in any way as an endorsement of the host, the site or the information contained therein, nor is such link to be inferred as an association or affiliation with the host.