General And Limited Partner
Are you looking to set up a limited partnership in Canada? Limited partnerships (LP) do not come into existence without first meeting the legal requirements.
An LP combines some of the advantages of a partnership with some of the advantages of a corporation. It has two kinds of partners. That is, general or limited partners. An LP must have one or more of each kind of partner. A general partner has the same liabilities, rights, and duties as a partner of a general partnership. A limited partner is primarily an investor. The ability of a listed partner is limited to the capital contribution or investment. This is the total amount that he or she agreed to contribute to the business. Further, the limited partner is not otherwise liable for the business debts. Nor are they responsible for the obligations of the partnership.
This form of business organization permits investors the protection of some limitation of their liability. However, it still allows them the income tax advantages of a partnership form of organization. That is, the partners are able to include this partnership income with other income. Therefore, they can deduct their share of business losses against their personal income.
Also, limited partnership units are like shares in that they are fully transferable. This is subject to any restrictions in the limited partnership agreement. Also, securities law may apply. Someone may trade shares lie any other security on the stock market. This gives the LP the ability to raise capital for the business. This will come from outside investors, like a corporation.
There are potential advantages of a limited partnership. They are quite simple to form. However, an LP agreement will almost certainly be expensive to prepare. It also provides a vehicle to raise capital for the business without exposing the investors to unlimited liability. This is because the limited partners are primarily investors and contribute capital to the business.
There is also limited liability for limited partners. Limited partners are only liable up to the extent of the amount of capital that they have agreed to contribute to the LP.
You can look at other types of legal entities below:
There are also tax advantages. An LP is able to take advantage of the income tax advantages of a partnership. That means a partner can include this partnership income with other income. Therefore, they can deduct business losses against his or her personal income when remitting income tax.
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General Partnership | Limited Partnership Canada
There are some disadvantages to limited partnerships. In order to form an LP to carry on business, the LP has to meet statutory requirements.
There is no limited liability of general partners. They are not limited in their liability for the business debts and obligations of the partnership. However, a person may be both a general and a limited partner in an LP.
It is more regulated than a sole proprietorship or general partnership. In order to be an LP, a certificate must be filed. Further, an extensive limited partnership agreement must be prepared. Lastly, the naming of the partnership is regulated.
Limited partners have no management control. There are things limited partners must do to maintain their privileged position of limited liability. They may not take part in the management of the partnership. Further, they cannot provide services to the partnership.
Where a limited partner carries on management duties he or she may be seemed to be a general partner, Therefore, they would lose his or her limited liability protection. It is sometimes difficult to determine when a limited partners’ role in an LP becomes a management role.
There is also limited protection for limited partners. It does not protect limited partners to the same extent that minority shareholders are protected in a corporation.
Below are some common terms associated with Limited Partnership In Canada:
- legal entity
- partnership agreement
- limited partners
- general and limited partner
- general partnership
Author: Alistair Vigier is the CEO of ClearWay Law