Ontario Limited Partnership Formation

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.

The New Delaware LLC (or Alternative for Investing)?
I honestly believe that Ontario Limited Partnerships will become the next type of Delaware Limited Liability Company.  Why?  Because those companies are being subject to more stringent tax reporting requirements.  Ontario Limited Partnerships are similar to Delaware LLCs in many respects.  First, the limited partners are liable for the partnership’s debts only up to their contribution or amount promised (akin to a corporation).  Second, the limited partnership is a flow through entity, so no taxes are paid at the limited partnership level  (akin to a partnership).  Ontario Limited Partnerships have the best of both words – corporation and partnership.  So long as you’re mindful of partnership laws, tax laws, securities laws and the like, you’ll be flying straight with your Limited Partnership.

Forming the Limited Partnership using  an extra-provincial corporation
OK, so you are not located in Ontario or even Canada, but you want to have an Ontario Limited Partnership to do business through. That’s perfectly OK for the purposes of Ontario law.  Now, remember: an Ontario LP is comprised of at least one general partner (typically a corporation, because the general partner is exposed to unlimited liability) and at least one limited partner (e.g. an individual, corporation, partnership, etc.).

So you have an extra-provincial corporation.  What next?  Well, if you want it to be the Ontario general partner, you need to obtain an extra-provincial license for the corporate partner.  There is a fee ($330) that has to be paid, paperwork that has to be filed, and an agent for service appointed in order to receive service on behalf of the extra provincial corporation.  I’ve previously blogged about this process here.  You can contact me directly if you need help doing this. Once you’ve got your extra-provincial license, you can now proceed to register the limited partnership using the extra-provincial corporation as a general partner.  THIS IS PERFECTLY OK.  This would not, however, be considered an extra-provincial limited partnership.  An extra-provincial limited partnership is a partnership that is already registered and organized in some other jurisdiction.

What about an extra-provincial LLC as the general partner?
I have spoken with government staff on a number of occasions and they have confirmed that an extra-provincial Limited Liability Company (i.e. not formed in Ontario or even Canada) CAN be the GENERAL PARTNER of an Ontario limited partnership.  So what’s an LLC?  A typical LLC is a hybrid entity: part partnership, part corporation.  It takes the best and worse of both worlds.  As a partnership, it can be disregarded for tax purposes.  This means it’s a flow through entity (just like an Ontario limited partnership).  So the members (not shareholders) who own the units of the LLC receive the profits and losses and are taxed accordingly.  This differs from a corporation, where the corporation is a separate legal entity (it gets taxed) and then the shareholders receive dividends (they get taxed again!).  So, as a partnership-like structure, it has tax advantages. But it also conveys limited liability status on its members and managers.  SWEET!

So how does an LLC become the general partner of an Ontario limited partnership?  Well, we look at the definition of a general partner under the Limited Partnerships Act. Section 2(2) of the Act says that “a limited partnership shall consist of one or more persons who are general partners…”.  OK, so a “person” can be a general partner.  So who’s a person, then? Turning to section 1(1) of the Act, we see that “person” includes an individual, sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate, and a natural person in his or her capacity as trustee, executor, administrator or other legal representative.  Hmmm…so does an LLC count as a “person”?  It has traits for both a partnership and a corporation.  It is also not incorporated.  I think it would fit within the definition of an “unincorporated organization” under section 1(1).  So I would argue that an extra-provincial LLC is capable of being the general partner for an Ontario Limited Partnership.

Before you can register your Ontario Limited Partnership, you’ll need to register the extra-provincial LLC: you fill out Form 6 and pay $80 to register the business name under the Business Names Act.  The registration lasts for 5 years, so be sure to renew it!  Also, if your name is inappropriate (e.g. includes certain words that identify it as being government) or confusing similar to a competitor’s name in the industry (particularly one that has a trademark), then you may run into problems trying to register or keep the name.  You might want to do a NUANS name search before submitting the registration to avoid wasting extra time and money if the name is inappropriate or confusingly similar to an already existing name.

written by admin \\ tags: forming an Ontario limited partnership, limited liability company, limited partnership, limited partnership agreement, llc, lp, ontario limited partnership

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.

I thought I would blog about certain nuances when it comes to limited partnerships formed by extra-provincial persons.  These are often referred to as extra-provincial limited partnerships, but I don’t think this is always the case (as discussed below).  But before we get into this discussion, lets start off with the basics, shall we?

What is an Extra-Provincial Limited Partnership?
An Extra-Provincial Limited Partnership is a few things.  First, it is a general partnership that is already is in existence.  A general partnership is the relationship that exists between two or more parties doing business in common with a view to making profit.  So, just to recap, if two individuals living in Mexico or the U.S. wanted to form an Ontario limited partnership, they would first have to have a general partnership between themselves.  Remember: an Ontario limited partnership is simply a designation granted by the Ontario statute.  Now, after being organized as a general partnership, it becomes a limited partnership – just not in Ontario.  A general partnership in Ontario becomes a limited partnership by filing and being issued a Form 3 Declaration from the Ontario government.  So the idea is that Ontario is willing to recognize limited partnerships from other jurisdictions.  That recognition is done when the Limited Partnership files a Declaration Form 3.

Now it’s important to note that I’ve generally come across two situations that involve limited partnerships formed by foreign entities: (1) a limited partnership organized outside of Ontario wishes to do business in Ontario and (2) extra-provincial persons wish to create and use an Ontario limited partnership as a legal structure but do not wish to do business in Ontario.  For the purposes of this blog, I’ll be discussing the second scenario.

What’s so special about the second scenario?  Well, it’s interesting because it is not the case that a limited partnership is formed outside of Ontario and which simply needs to register as an extra-provincial limited partnership.  The reality is that the limited partnership is being formed in ONTARIO under the Limited Partnerships Act, but it is done so by persons who are not resident or doing business in Ontario.  This can get a big confusing: it’s not an extra-provincial limited partnership, it’s just a plain old regular Ontario limited partnership.  The only difference is who is forming it.  So, just to recap, I’m going to be talking about how foreign persons (i.e. an extra-provincial corporation, such as a U.S. or Mexican company) can form an Ontario limited partnership.

Extra-Provincial License for the Corporation
OK, so here’s the situation.  A corporation is set up to be the general partner.  Lets assume, for simplicity’s sake, that this corporation is not an Ontario or even Canadian corporation (if it is, then there would need to be compliance with Ontario or Canadian corporate, tax, and securities laws with respect to that corporation).  For their part, limited partners are ready to partner up with the general partner.  How does it all fit together such that they form an “Ontario Limited Partnership”?

Well, the Ontario government will only allow an extra-provincial corporation to be a general partner if it has obtained a license under the Extra-Provincial Corporations Act.   Even if it’s not doing business in Ontario, the government here wants to know who this extra-provincial corporation is.   So they’ll want to see (among other things) information about the corporate name, head office, jurisdiction which it is created and subject to, its proposed business in Ontario, etc. They will also need to see how is the Agent for Service in Ontario.  The idea is that someone over 18 years old who is resident in Ontario or a corporation with a head office in Ontario must act as the Agent for Service of the extra-provincial corporation for the purpose of receiving service of process, notices, or other proceedings (so that service on the Agent is deemed to be service on the extra provincial corporation).  In certain situations, the Ontario government will also want an ORIGINAL Certificate of Status issued under the seal of the incorporating jurisdiction, signed by the proper person, and showing:

1. The name of the corporation;
2. The date of incorporation;
3. The jurisdiction to which the corporation is subject; and
4. That the corporation is valid and existing.

Some jurisdictions (e.g. Netherlands) do not provide these kinds of certificates, but the Ontario government still allow corporations from these jurisdictions to be registered.  Finally, the Ontario government will want to see an original NUANS name search report to make sure that there is no conflicting or confusingly similar name of the corporation which is currently in existence.  It generally takes about 3 weeks for the paperwork to be processed once the Ontario government has received it.   There are also government fees (i.e. $330) which must be paid to obtain this extra-provincial corporate license.

Registering the Limited Partnership
Now that you’ve got your extra-provincial corporate license in hand for the general partner, it’s time to register the Limited Partnership.  Now, as I said above, in the situation I’m describing, the limited partnership has not been formed elsewhere; there is no other organizing statute; so there is no extra-provincial limited partnership.  All that’s happening is the formation of a plain and simply limited partnership in Ontario by a general partner who is not a resident in Ontario (it’s a corporation formed outside of Ontario but with a license to conduct business here).  And, to simplify matters, I’m also assuming that the limited partnership is not doing business in Ontario.  So you fill out the Declaration Form 3 and pay the $220 government filing fee.  Once registered, you will need to file a renewal every 5 years.  Note: the Ontario government will not send notices out, so you better just keep your eye on the date when the limited partnership must be renewed!

Now, I’ve personally gotten into some debates with government staff as to how to go about filling out this declaration for the situation I’ve described.  I’ve spoken with managers in the government office because they seem to believe that the form should be filled out in a certain way.  I would strongly urge you to contact me to deal directly with government staff to prevent delays with respect to registering the LP.  They may not understand the intricacies of the Limited Partnerships Act and may simply demand documentation which is not needed.  It’s quite easy to make mistakes, given that the laws concerning limited partnerships are not always clear.

Carrying on the business of the partnership
Now that the limited partnership has been established, business can be conducted.  As I’ve previously blogged about, in Ontario, the limited partnership is not a legal entity capable of holding or dealing with limited partnership property.  Rather, it is the general partnership, which has been entrusted with managing the affairs of the limited partnership, which does so on its behalf.

Taxes!
So finally, we come to the issue of taxes.  In Canada, a Ontario limited partnership is not a separate legal entity (unlike a corporation) or a”person”.  I have previously blogged about this here.  As such, they are not considered to be taxpayers (i.e. who are, indeed, “persons”) under the Canada Income Tax Act.  Rather, partnership income, losses, assets, and liabilities are all attributable to the partners as per the limited partnership agreement. As per the Canada Income Tax Act, partnerships do not file separate tax returns. They file annual “information returns” setting out their income and details of the partners who are entitled to that income. It is the partners who are required to pay income tax. The limited partnership is simply a flow-through entity.

So to recap: the net income of the partners (for income tax purposes) of a limited partnership is determined by figuring out the net income of the limited partnership.  To figure out the net income of the limited partnership, the Act says that you look at it as if it were a separate legal person: s. 96(1)(a). So you include income and deduct allowable expenses and other credits. Then, the limited partnership’s income will be attributed to the partners (usually as per the limited partnership agreement). Each partner must report their income or losses from the partnership and pay taxes accordingly: s. 96(1)(f).

Now, if the partners (e.g. extra provincial general partner and the limited partners) of the limited partnership are resident of some country other than Canada, the issue comes up as to whether any tax is owing in Canada.  Generally, under the Income Tax Act, RESIDENTS of Canada at any time in the year are required to pay tax on their worldwide income: section 2(1).  Now, if an individual is a non-resident, then they may still have to pay Canadian income tax if they received certain kinds of income from Canadian sources – such as employment income, business income, or income derived from the sale of taxable Canadian property.  Now this stuff is somewhat complicated and long-winded, so I think I’ll dedicate another blog to the topic of taxation of partners of a limited partnership if they are resident or non-resident in Canada.

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Ontario Limited Partnership Agreement Lawyer: Terms and Conditions

Please keep in mind that this is not legal advice. The information provided herein is for educational purposes only. If you would like to get in touch with a lawyer to help you draft, interpret, negotiate or resolve a dispute about an Ontario limited partnership agreement, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers). We have Ontario lawyers who can assist you in this regard (I would know, I’m one of them!). If you want to get in touch with me directly, feel free to email me directly to discuss all your limited partnership agreement needs! If you’d like to buy a text link on this blog post, you can contact me directly.

This is the third of a series of blog posts I’m writing about the terms typically found in a limited partnership agreement. In my first blog, I talked about the Introductory Clause, the Definitions and Interpretation, and the Name of the Limited Partnership. In my second blog, I discussed the Term, Place and Description of Business, and Status of the General Partner.  In this blog, I’ll be discussing the Status of a Limited Partner, Capital Contributions, and Division of Net Profits.  Again, if you need help in this regard, give me a shout!

Status of Limited Partner
Now, I’ve blogged extensively about what it means to be a limited partner.  Essentially, you are a passive investor.  You have certain rights under the Limited Partnerships Act and your liability is generally limited to your contribution to the partnership.  There are exceptions to having limited liability.  These exceptions include having your surname (if you’re an individual) or a distinctive part of your corporate name (if you’re a corporation) form part of the name of the Limited Partnership (see section 6(1) of the Limited Partnerships Act).  If this is the case, then the limited partner could be as liable as a general partner (i.e. unlimited liability for the limited partnership’s debts and obligations!).  Another exception is when the limited partner take part in controlling the business of the corporation (see section 13(1) of the Act).  When this happens, the limited liability protection is also lost.  So, although these things are covered in the Limited Partnerships Act, it may be worthwhile to repeat them in the agreement itself.

Capital Contributions
If you don’t have an agreement, all of the limited partners will have to contribute equal amounts of capital to the limited partnership.  This is just the function of all partners being equal under the Partnerships Act.  This can be modified, however, through a limited partnership agreement.  In this regard, you’ll want to specify the amount or percentage and date of initial capital contributions which each limited partner will be making. “Capital” means the sums contributed by the partners for the purpose of commencing or carrying on the partnership business and is intended to be risked by the partners in that business.  When a partner contributes capital to a partnership, that capital becomes the property of the partnership.  The individual partner loses their property interest in the asset they contributed as capital (be it money or property – but NOT services) and gains an ownership interest in the property of the partnership as a whole.   That’s why section 7(2) of the Limited Partnerships Act says that a limited partner’s in the limited partnership is PERSONAL property (even if they contributed REAL property such as land or buildings).

An important question which may come up is whether capital contributions will be required – for example at some date or event in the future or on a regular basis.  In order for a limited partnership to be exempt from registering or issuing a prospectus under Ontario securities laws, it must impose regular capital contributions on its membership for financing purposes (this is one of many requirements to qualify as a private investment club).

One way or another, the capital contribution of the limited partners should be documented in a schedule that includes the following information:

• Date
• Name of individual or corporation
• Address of individual or corporation
• Capital Contribution in Canadian dollars
• Percentage Interest received

In exchange for contributing capital and signing the limited partnership agreement, each limited partner should also sign a Subscription Agreement which explains more of the rights and responsibilities of the limited partner, as well as outlining any securities exemptions which the limited partnership is seeking to rely upon.

Division of Net Profits
Under Section 11(1) of the Limited Partnerships Act, a limited partner has the right (subject to the Act) to a share of profits and to have their contribution returned.  If there is no agreement, each limited partner will be entitled to profit in proportion to their actual contributions.  Worth mentioning however, is that, under section 11(2) of the Act profits may not be paid out as income to limited partners if doing so would reduce the limited partnership’s assets to the extent that it would be insufficient to discharge its liabilities to third parties (i.e. parties who are not general or limited partners).

In another blog, I’ll continue my discussion of the terms found in a typical limited partnership agreement.

written by admin \\ tags: limited partnership, limited partnership agreement, limited partnership contract ontario, limited partnership terms, limited partnership terms and conditions, ontario limited partnership, ontario limited partnerships agreement, toronto partnerships lawyer

Ontario Limited Partnership Agreement Lawyer: Terms and Conditions

Please keep in mind that this is not legal advice. The information provided herein is for educational purposes only. If you would like to get in touch with a lawyer to help you draft, interpret, negotiate or resolve a dispute about an Ontario limited partnership agreement, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers). We have Ontario lawyers who can assist you in this regard (I would know, I’m one of them!). If you want to get in touch with me directly, feel free to email me directly to discuss all your limited partnership agreement needs! If you’d like to buy a text link on this blog post, you can contact me directly.

This is the second of a series of blog posts I’m writing about the terms typically found in a limited partnership agreement.  In my first blog, I talked about the Introductory Clause, the Definitions and Interpretation, and the Name of the Limited Partnership.  I’m going to continue my analysis by discussing the Term, Place and Description of Business, and Status of the General Partner in this blog.  Again, if you need help in this regard, give me a shout!

Term of the Partnership
The Term has to deal with when the Limited Partnership is formed (i.e. upon the filing and receipt of the Form 3 Declaration under the Limited Partnerships Act) and how long it will survive for.  Now, worth noting is that a Limited Partnership is, first and foremost, a partnership.  This means that it is also governed by the Partnerships Act (so long as there is no conflict with the Limited Partnerships Act).  Now, under section 26(1) of the Partnerships Act and at common law (i.e. judge made law), a partnership is considered to be a “partnership at will” unless some agreement to the contrary can be proved.  “At will” means that the term of the partnership is determined at the will of the partners.  So if a partner wishes to end the partnership, then they can do so by giving notice to all of the other partners of their intention to terminate.  Section 26(1) has been interpreted in Patridge v. Seguin, [1991] O.J. No. 1355 to mean that, where the partnership agreement is silent as to the duration of the partnership, any partner may unilaterally terminate the partnership by giving notice.  If, however, the partnership agreement provides for the termination of the partnership, then this section will not apply.  As such, this section is subject to any agreement between the partners.  So, to recap, if the partnership agreement specifies some manner in which to terminate the partnership (e.g. by mutual agreement, through a shotgun buy-sell provision, etc.), then that will mean that the partnership is not “at will” (i.e. cannot be terminated under section 26(1)) and the partnership agreement must be complied with in order to terminate the partnership.

Place and Description of Business
An Ontario limited partnership needs to have some place to hold its partnership records.  Those records can be inspected by limited partners pursuant to rights afforded to them under the Limited Partnerships Act.  The government also needs to know where to send service of documents.  For these reasons, you should identify the principal place of business or head office of the Limited Partnership in the agreement (you’ll need to do so anyways in the Form 3 Declaration).

When it comes to describing the business affairs of the Limited Partnership, it all comes down to disclosure and authorization.  Here, the Limited Partnership is disclosing its line of business (e.g. buying, trading, and holding securities and real estate).  It is also authorizing its general partner to do those things which are necessary to give effect to its business activities.  Perhaps the scope of authority of one or more general partners will be limited here?  Perhaps the business of the limited partnership will not be able to change unless the limited partners consent (e.g. through a special 2/3 vote)?  The idea is that the business of the partnership will be tailored to the specific needs and requirements of the general and limited partners.  Some may want a narrow definition, while others may want it very broad.  At the end, it will come down to what the parties want.

Status of the General Partner
Here, following up on the activities and business of the limited partnership, you’ll want to state that the General Partner is in charge of the limited partnership’s activities (and / or any limitation on those powers).  You could, if you wanted to, state that the General Partner has unlimited liability (as per the Limited Partnerships Act).  But you also want to state here what the General Partner is – typically a corporation incorporated under the province of [x].  You’ll also want the General Partner to indicate that it has all the necessary powers, approvals, and authorizations to act as the General Partner for the limited partnership and will not be in any conflict with internal or external documents or agreements as a result.

In another blog, I’ll continue my discussion of the terms found in a typical limited partnership agreement.

written by admin \\ tags: limited partnership, limited partnership agreement, limited partnership contract ontario, limited partnership terms, limited partnership terms and conditions, ontario limited partnership, ontario limited partnerships agreement, toronto partnerships lawyer

Ontario Limited Partnership Agreement Lawyer: Terms and Conditions

Please keep in mind that this is not legal advice. The information provided herein is for educational purposes only. If you would like to get in touch with a lawyer to help you draft, interpret, negotiate or resolve a dispute about an Ontario limited partnership agreement, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers). We have Ontario lawyers who can assist you in this regard (I would know, I’m one of them!). If you want to get in touch with me directly, feel free to email me directly to discuss all your limited partnership agreement needs!  If you’d like to buy a text link on this blog post, you can contact me directly.

So in this blog and the next few ones, I’ll be talking about some of the standard terms you can find a typical Limited Partnership Agreement.   Again, if you need help in this regard, give me a shout!

Introductory Clause
This is the first clause in a Limited Partnership Agreement.  It will include the date, the parties, and an indication that the agreement is a Limited Partnership Agreement.  When I see things like “On the First Part”, “On the Second Party”, etc., I ask myself: “Why is this here?  What purpose does it serve?”  I don’t believe it’s helpful to include confusing and archaic language so I remove it.  Worth mentioning is that the parties can be corporations; indeed, it is generally preferable and commonplace to see the General Partner (which has unlimited liability) as a corporation.  The individuals who are the limited partners must be at least 18 years old.  Remember: for a limited partnership to exist, there must be at least one general partner and one limited partner.

Recitals
This is where you can provide some information about the background and context for which the parties are entering into the agreement.

Organizing the Body of the Agreement
The body of the Agreement is typically broken down into Articles (main headings) and Sections (sub headings).  I like to use the following breakdown: Article I – Definition and Interpretation, Article II – The Limited Partnership, Article III – Management of the Limited Partnership, etc.  And within each article, I use Sections such as 1.01. Definitions, 1.02.  Interpretation, etc. So lets dive into some of these Articles and Sections, shall we?

Definitions
Here, you can define terms used throughout the Agreement for ease of reference.  Things like “Act” refer to the “Limited Partnerships Act“.  The “Agreement” means the Limited Partnership Agreement, as amended, and Scheduled attached to it.  “Business Day” means this and “Fiscal Year” means that.  You get the point.  PLEASE PLEASE be sure not to include terms that are not used in the Agreement.  I see this all the time.  It takes up space and adds nothing.

Interpretation
This part includes some pretty standard stuff about how the contract will be interpreted.  For example, singular words can become plural, depending on the context.  Same goes for masculine vs. feminine.  There will also be a provision that states that Article and Section headings do not form part of the agreement for interpretation purposes, but are for convenience only.

The Name of the Partnership
There are a few things worth mentioning when it comes to the name of the limited partnership.  First, you might want to consider doing a name search to see if the name is already in use by a business in the same or similar industry (which could cause confusion).  If no such name exists, then the partners might want to consider trademarking it.   Remember: if the surname or distinctive part of a corporate name of a limited partner is included in the limited partnership’s name, then that limited partner may be liable as a general partner: section 6(1) of the Limited Partnerships Act.

In the next blog, I’ll continue my discussion of the terms found in a typical limited partnership agreement.

written by admin \\ tags: limited partnership, limited partnership agreement, ontario limited partner, ontario limited partnership agreement

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.

So following up on my previous blogs about limited partnerships (e.g. what they’re all about and how a limited partner can lose their limited partner status), I thought I would dedicate this blog to address the following question: is a limited partnership a separate legal entity from its partners?

The answer is “no”.

A limited partnership is a type of partnership governed by the Ontario Limited Partnerships Act, the Ontario Partnerships Act, and the limited partnership agreement that exists between the general and limited partners (if any).  There is nothing that confers on a limited partner the status of being a separate legal person.

With these things being said, there are a number of legal situations where a limited partnership appears to be a separate legal entity.  For example, a limited partnership:

• can sue and be sued;
• can file its own income taxes;
• can be petitioned into bankruptcy; and
• has its own property (for the purposes of dissolution and redistribution);

But don’t get confused: these instances are mere conveniences granted by statutes to a limited partnership to recognize it temporarily for various purposes (e.g. civil litigation, tax, bankruptcy, etc.).  Always remember that a limited partnership is simply a special kind of partnership that is not a separate entity from its partners.  Think of it like a marriage between persons…

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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.

As a follow up to my recent blog post about limited partnerships (what they are, how to create one, partnership name, etc.), I thought I’d follow up with another blog about how limited partners can LOSE THEIR LIABILITY STATUS!!!  Remember: I’m only dealing with Ontario limited partnerships.  You should check out your province’s own legislation dealing with limited partnerships and the caselaw that interprets that legislation.  Also, be sure to get a lawyer to update you on any new legislation or cases that impact limited partnerships.

So we start off with the idea that limited partners are generally liable only to the extent of their contribution.   Their contribution must be stated in the records of the limited partnership and such records must be kept at the limited partnership’s principal place of business in Ontario: s. 4.

Limited partners have a number of rights in the limited partnership (same as general partner) under the Ontario Limited Partnerships Act, including:

• the right to inspect and copy the books of the limited partnership (s. 10(a)):
• the right to be given a complete and formal account of the limited partnership’s affairs (s. 10(b));
• the right to obtain dissolution of the limited partnership by court order (s. 10(c));
• the right to share in the profits and other compensation of the partnership (s. 11(1)(a)), subject to other provisions of the Act;
• the right to have their initial contribution returned (s. 11(1)(b)), subject to other provisions of the Act;
• the right to examine the “state and progress” of the limited partnership business and advise as to its management (s.12(2)(a));
• the right to act as a contractor for or an agent or employee of the limited partnership or of a general partner (s.12(2)(b));
• the right to act as a surety for the limited partnership (s.12(2)(c)).

Now here’s the kicker: (as previously blogged about) 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.

Even more importantly: if a limited partners “takes part in the control of the business” of the limited partnership, then they shall be fixed with the same UNLIMITED LIABILITY as a general partner: s. 13(1).  Keep in mind that a limited partner, simply by exercising their other rights and powers granted to them under the Act (i.e. above), will not assume the liability of a general partner.  Such liability only attaches to them exercising control beyond the scope of what they are allowed to under the Act.

So what have the Ontario courts said about this whole “takes part in the control of the business” situation?

Well, at present, the leading case in Ontario is Haughton Graphic Ltd. v. Zivot,33 B.L.R. 125 (Ont. H.C.J.), aff’d 38 B.L.R. xxxiii (Ont. C.A.), leave to appeal denied 38 B.L.R. xxxiii (S.C.C.).  Here are the facts of the case:

• The Defendants wanted to launch a magazine to be published in the U.S.
• They represented to a printing company that they were the president and vice-president of a limited partnership under Alberta Law.
• A deal was struck for the printing company to print the Toronto magazine.  In late 1982, it printed the first five issues.
  
• The limited partnership went into bankruptcy, leaving the printing company unpaid for the printing of three issues.
• The printing company decided to sue the limited partners personally to get its money back.
• Importantly: one of the defendants had incorporated a business and made it the general partner of the limited partnership. That defendant controlled the corporation.  That corporation employed both defendants.

So the question in that case came up: should the limited partners – in their personal capacity – be held liable for debts owed by the limited partnership on the basis that they took part in the control of the business? The court was looking at Alberta laws of limited partnership, which were akin to s. 13 of the Ontario Limited Partnerships Act.

The Ontario High Court of Justice essentially said: “Yes, they’re liable”.   Eberle J. said that the defendants were “in complete control of the limited partnership”: one defendant was the directing mind of the limited partnership, was responsible for it, and managed it.  He signed cheques on behalf of the limited partnership (the other defendant had authority to do so).  The fact that they were both employees of the general partner did not save them.

What’s also important in this case is that the Court rejected the defendant’s arguments that they shouldn’t be liable on the basis that the printing company knew it was dealing with a limited partnership.  The idea here is that a limited partner who takes part in controlling the business shouldn’t be liable if the creditor believes that the limited partner was a general partner.  But the court rejected that argument.  Eberle J. stated that that: “If reliance was a necessary precondition to unlimited liability for a limited partner, appropriate words should be in the statute”.

So what’s the moral of the story?  Be cautioned: if you’re both a limited partner and an officer or director of a general partner, your liability will be unlimited if you take part in the control of the business – even if you claim you did so in your capacity as an officer or director of a general partner and not as a limited partner!

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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.

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