Nicolas Guevara-Mann | Queen’s Business Law Clinic | October 2021
Editor: Mikela Page
Recall that a partnership is formed whenever two or more persons carry on business with a view to profit. This means, in some cases, that merely contributing investment money to a business can create a partnership relationship resulting in all the legal consequences of a partnership, including unlimited joint liability. This poses a problem where an investor wants to invest in a business (so that they can share in its future profits) but does not want to be exposed to unlimited liability.
Limited Partnerships are a type of partnership that allow for passive investment without the exposure to unlimited liability. They consist of one or more “general partners” and one or more “limited partners.” In Ontario, Limited Partnerships are governed by the Limited Partnerships Act. Unlike a partnership, Limited Partnerships is not likely to be accidentally created and must be registered.
The general partner in a Limited Partnership is very similar to a partner in an ordinary partnership. They remain liable for all the debts and obligations of the partnership and are in charge of the management of the business. Limited partners, on the other hand, are limited in the sense that their liability for any debts of the Limited Partnership is capped at their investment in the corporation. For example, if they invest $1000, they will only have to pay $1000 if creditors demand payments from the Limited Partnership. In exchange for limited liability, limited partners cannot take part in the management of the business. They can contribute money and other assets but cannot offer management services. Please note that where a limited partner actively manages the affairs of the business, they will lose the benefit of limited liability. A limited partner could, however, be an employee of the business, whereas general partners
Limited Liability Partnerships, on the other hand, are a special subset of ordinary partnerships that share features of a partnership and a corporation. Despite the name, Limited Liability Partnerships are not a subset of Limited Partnerships. Like a partnership, they are governed by the Partnerships Act which also limits which professions are permitted to form this type of business vehicle. Limited Liability Partnerships are intended to be a way for professionals to pool their resources while not being liable for another partners’ professional negligence. They are incredibly common among lawyers, accountants, and medical professionals (hence the “LLP” you might have seen at the end of a business name). Partners in this type of business vehicle are still generally liable for all business obligations of the partnership but are not liable for one partner’s tortious acts in carrying out their business.
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