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A follow-on to our article on the General Partnership, this article outlines the who, what, where, when and why of the two specialized forms of partnership - the limited partnership and the limited liability partnership (or "LLP").
According to British Columbia’s Ministry of Jobs, Trade & Technology[1] there were a total of 501,300 businesses in British Columbia in 2017; of these a full 493,100 businesses (98 per cent) were considered small businesses with fewer than 50 employees (and 302,700 of these businesses (60 per cent) were self-employed individuals with no employees). According to B.C.’s Ministry of Jobs, Trade & Technology, small business in B.C. accounts for 35 per cent of overall gross domestic product (GDP).
Clearly, small business owners and the self-employed represent a significant portion of business conducted in British Columbia.
Usually long before an entrepreneur contacts a lawyer, if they ever do, they have considered the what (as in what business they wish to pursue) and the question of why they want to start a new business. One of the first questions often asked when finally seeking advice is how should the business be structured – more likely, should I incorporate my business or not?
For this series we will set aside consideration of specialized subsets of the structures below like not-for-profits, societies, cooperatives, community contribution companies, unlimited liability companies (ULCs) and business required to be formed under particular statutes.
Generally, there are four potential business structures to choose (or not choose, in some circumstances) from:
Sole Proprietorship
General Partnership (see here)
Limited Partnership
Corporation
Below, we will now consider the limited partnership and the limited liability partnership (LLP) structures.
Limited Partnerships
Limited partnerships (unlike a general partnership but similar to corporations) are creatures of statute and do not come into being until the statutory requirements have been fulfilled. In British Columbia, the legal requirements to form a limited partnership are set out in the Partnership Act (British Columbia).
A limited partnership is really a form of hybrid partnership and corporation. It consists of two kinds of partners: one referred to as “general” partners or partner (with much the same liabilities, rights and duties as partners in a general partnership) and the other “limited” partners or partner (primarily an investor and as such unable to participate in the management of the limited partnership). The liability of limited partners for the business debts and obligations of the partnership is limited under legislation to the amount of capital they have agreed to contribute to it and, in that regard, limited partners are very similar to shareholders of a corporation. The limited partnership business structure permits investors (limited partners) the protection of some limitation of their liability similar to a corporate form of organization while allowing them the income tax advantages (in particular the deduction of losses against personal income) of a partnership form of organization. This makes the limited partnership, like the corporation, a potential structure to raise capital for a business.
A limited partnership is in many ways a complex and sophisticated form of business organization that requires certain filings with the BC Registrar to establish and maintain its existence as well as an often extensive agreement that sets out the rights and restrictions of the partnership and the who, what and where of the general partner(s) and the limited partner(s) - usually tailored to the particular business that is being undertaken by the limited partnership.
In addition to its potential complexity, a limited partnership may have other potential disadvantages, including:
third parties, such as lenders, are reluctant sometimes to deal with limited partnerships;
limited partners have no management control, while general partners have no limited liability (unless they incorporate);
limited partners who get involved in operations lose their limited liability protection and may be deemed to be general partners; and
the Partnership Act (British Columbia) does not have the degree of protection for limited partners equivalent to the protections for minority shareholders contained in, for example, the Business Corporations Act (British Columbia).
Limited Liability Partnership
A limited liability partnership (“LLP”) is a modified form of general partnership. Like limited partnerships, LLPs are created by statute and do not come into existence until the statutory requirements have been fulfilled. The concept of an LLP is relatively new and although this business structure has been used for professional practices like lawyers and doctors in some other provinces in Canada for several years, LLPs have only been permitted in British Columbia since 2005 (and, unique to British Columbia, the registration of LLPs are not restricted to professional practices).
LLPs have many of the same advantages as limited partnerships, with the added benefit that the members of an LLP can take an active role in the business of the partnership without exposing themselves to personal liability for the acts of the other partners beyond the value of their investment in the partnership. However, it should be understood that while a British Columbia LLP confers a form of what is called "full-shield" limited liability, in certain cases an LLP does not afford the same degree of protection from liability as corporations or limited partnerships. For example, a limited liability partner may be personally liable for negligent or wrongful acts if that partner knew of some act on behalf of the partnership that was deemed negligent or wrongful and did not take reasonable steps to prevent it. Also the partners of an LLP are personally liable for a partnership obligation if and to the same extent that they would be liable if the obligation was an obligation of a corporation and they were directors of that corporation. So, for example, a limited liability partner may be liable for unpaid wages and taxes; or for environmental damage or contamination.
British Columbia LLP’s are, like limited partnerships, required to have a partnership agreement but there remains considerable flexibility as to the terms of that partnership agreement which allows for provisions modeled for the particular undertaking.
Still, the flow-through income and tax structure of the partnership model; the relative ease of formation and the relatively good reputation of British Columbia and Canada in terms of its legal and regulatory systems all may suggest that the British Columbia LLP is potentially ideal for certain business undertakings and, in particular, for international businesses seeking a business structure in North America (similar to the historically popular Delaware LLC which has fallen out of some favour as recent changes to tax law have made tax compliance more complex and ultimately expensive).
Endeavor Law can assist new entrepreneurs and small business owners consider, implement and maintain the business structure that is right for their particular circumstances including the preparation of formal partnership agreements. Endeavor Law will always seek to provide competitive pricing for any legal services requested and is pleased to discuss fee arrangements that suit any potential client.
Does not constitute legal or other advice and must not be used as a substitute for legal advice from a qualified legal professional in your jurisdiction who has been fully informed of your specific circumstances. Information may not be up-dated subsequent to its initial publication and may therefore be out of date at the time it is read or viewed. Always consult a qualified legal professional in your jurisdiction.
[1] SMALL BUSINESS PROFILE 2018 published by the B.C. Ministry of Jobs, Trade & Technology (see here).