Limited Partnerships Lawyer

What is a partnership? A partnership is a joint business venture between two or more persons in hopes of achieving profits.

The general definition of a partnership is defined in the Partnership Act of Alberta, which states that a partnership is a relationship between two or more persons carrying on a business in common with a view to profit. The Partnership Act governs the rights and responsibilities of the partners in the partnership. A partnership can involve a number of people, including individuals and corporations, and can be created either by agreement amongst the parties or by their conduct. However, it is important to have a written partnership agreement, which sets out the obligations of each partner along with the other partners involved.

The advantages of forming a partnership:

• As a partnership involves two or more persons acting together, there is an opportunity for them to pool their financial, managerial and technical resources;
• Partnerships are very flexible in terms of organization;
• The Partnership Act provides a standard set of rules which governs a partnership, although, the partners, through a partnership agreement, can elect to change some of the rules; and
• Partnerships can be a tax effective structure, especially in the early stages of a business; thereby any losses of the partnership can be used to reduce the partners’ personal income tax liabilities.

In contrast, partnerships pose some disadvantages:

• Since a partnership is not a separate legal entity, the partners are jointly and severally liable with all the other partners for all the debts and obligations of the business carried on by the partnership;
• When one partner acts in the name of the partnership, it binds each and every other partner, even if a partner is unaware of such action;
• Partners can be sued personally by any external third party that is seeking to recover losses; and
• Management decisions are more complex as all the other partners need to be consulted.

There are three relatively common partnership types:

1. General Partnerships;
2. Limited Partnerships; and
3. Limited Liability Partnerships;

Limited Partnerships

Limited partnerships are governed by the Partnership Act and are distinct from the partnerships discussed above, which are referred to as general partnerships. The key feature of limited partnerships is that there are two types of partners: general partners and limited partners. There can be more than one general partner in a limited partnership, however most limited partnerships consist of one general partner. A general partner manages the partnership thereby limiting the control and/or management of a limited partner. The limited liability of limited partners is the primary advantage of limited partnerships. Since a general partner is responsible for managing the business of the partnership, the general partner is personally liable for all the debts and liabilities of the partnership, just as a partner in a general partnership.

A limited partner is not personally liable for the debts or liabilities of the partnership beyond their investment in the limited partnership. However, in order to keep their status as a limited partner and their limited liability, a limited partner cannot be involved in the management of the business. For instance, if a limited partner is to take part in the activities and or management of the limited partnership, they may be deemed to be a general partner and lose the limited liability protection of being a limited partner.

Legal Requirements for a Limited Partnership

Part two of the Partnership Act outlines the criteria in which a limited partnership can be created. Under the Partnership Act, a limited partnership is formed when a certificate is filed with the Registrar. The certificate must adhere to the requirements outlined in the Partnership Act and in particular must indicate the firm name, character of business, names and addresses of the partners, amount of money or nature and fair value of property contributed by the limited partners and the limited partners share of the profits of the firm.

The name of a limited partnership should not mention the surname of a limited partner. The only time a surname can appear in the firm name is if it is the surname of the general partner. Further, the name of the limited partnership must be registered.

Limited Liability Partnerships

A limited liability partnership is a sub-set of a limited partnership that is governed by the Partnership Act. The Partnership Act of Alberta states that an “eligible profession” may conduct business as a limited liability partnership, although an eligible profession must mean a profession or discipline that is regulated by an Act of Alberta that authorizes members of the profession or discipline to form a limited liability partnership. Limited liability partnerships are reserved for professional service firms such as law, medical, accounting, or engineering. Partners may be either the individual practitioners in those professions or their respective professional corporations. Further, all the partners in a limited liability partnership must be a member of the same regulated profession. For example, a lawyer who is regulated by the Law Society of Alberta cannot be in a limited liability partnership with an accountant.

In contrast to a limited partnership, each partner in a limited liability partnership is permitted to be involved in the management of the partnership’s business. The liability of partners in a limited liability partnership is limited to their initial investment and thus the partners are not jointly liable with all the other partners for any liabilities that occur during the course of the partnership.

Advantages of a Limited Liability Partnership

• The main advantage of a limited liability partnership is that it allows for liability protection of the partners. Further, partners of a limited liability partnership are not liable for the partnerships obligations arising from negligence or misconduct of other partners, employees, or agents during the ordinary course of practice, unless they were directly supervising the activity which lead to the loss or knew of the activity at the time and failed to take steps to prevent the activity.

Disadvantages of a Limited Liability Partnership

• The disadvantages of a limited liability partnership are the same as a general partnership with the exception of liability.

Legal Requirements for a Limited Liability Partnership

Part three of the Partnership Act deals with the registration of a limited liability partnership. In Alberta, in order to create a limited liability partnership, the partnership must make an application to the Registrar, which sets out:

1. the name of the partnership;
2. the eligible profession; and
3. any further details required under regulation.

In addition to the above, the application must be submitted with a statement from the individual authorized by the respective profession’s governing body confirming that the persons in the limited liability partnership are covered by liability insurance and that all the eligibility requirements required by the profession have been satisfied.

When naming a limited liability partnership, it must contain the legal element “LLP” in the name either in full or abbreviated form. The name of a limited liability partnership in Alberta for instance may not be the same or similar as any other Alberta limited liability partnership or any extra-provincial limited liability partnership registered in Alberta.

Limited Partnerships vs. Sole Proprietorship

A sole proprietorship is the most simplest and inexpensive form of business structure in comparison to a limited partnership or other business structures. A sole proprietorship refers to an individual who carries on business without engaging in the necessary required steps as would be for a limited partnership. The owner of a sole proprietorship has the sole responsibility for making all the decisions for the business, receives all the profits, and claims all the losses. The owner in a sole proprietorship is personally responsible for all the debts and liabilities of the business. Further, in addition to any business assets, all personal assets of the sole proprietorship are at risk. For example, if a sole proprietor receives a loan from the bank, even if it is not intended for the business, and the sole proprietor defaulted on the loan, the creditor would be able to seek compensation from either the business or personal assets of the sole proprietor.

In a sole proprietorship, the business is not considered a separate legal entity from the individual and therefore the individual maintains unlimited liability for all the debts and liabilities of the business. This is similar to a general partner in a limited partnership, as a general partner remains fully liable for all the debts and obligations of the limited partnership. However, limited partners maintain limited liability, which is dependent on the amount of capital contributed by the limited partner.

In addition, conducting business as a sole proprietor may cause difficulty in raising capital in contrast to a limited partnership where capital can be raised from investors. The available working capital is limited to the assets of the sole proprietor and to the credit that the sole proprietor is able to obtain.