The Limited Partnership (“LP”)

Introduction:  Previous articles discussed characteristics of sole proprietorship and general partnership.  This article will discuss the limited partnership business structure.

limited partnership (LP)Limited partnerships can carry on any business that a general partnership may, and offers limited liability to some partners, known as the “limited partners”.  For this reason, this business structure is often used in partnerships in which a passive investment vehicle is desirable for certain investors (the limited partners).

A limited partnership has at least one general partner and one limited partner.  General partners are responsible for daily management/control of the business and have unlimited liability.  Liability of the limited partners is limited to their investment so long as they do not participate in the management/control of the business per s. 17 of the Limited Partnerships Act, RSNS  1989 c. 259  (“LPA”).  S. 8 (1) states that limited partners may contribute cash and other property, but not services to the limited partnership.  The importance of understanding and adhering to this cannot be stressed enough, as if a limited partner oversteps his or her role in the partnership, the benefit of having the limited liability status of a limited partner may be lost.  It is very important to have a partnership agreement, (just as it is with a general partnership).  The agreement in a limited partnership is typically called a Limited Partnership Agreement.  This agreement will set out the expectations and roles of the partners in the limited partnership.

A limited partnership is created in Nova Scotia by filing a certificate pursuant to the Act with the Registrar of Joint Stock Companies, per the LPA, at s. 5 (1), which contains detailed information about the nature and terms of the limited partnership.

The tax implications are similar for a limited partnership as they are a general partnership, however there are some differences which are beyond the scope of this article.  It is always recommended that when taking advice in starting a business that you get tax legal and accounting advice specific to your unique situation.

The limited liability feature for limited partners is an attractive feature for investors seeking a passive investment.  This feature which limits a limited partner’s liability for partnership debts and other obligations can only be imposed by a statute.  Further, limited partners have the same rights as general partners to information, profits as and return of their contribution, and they may enter and leave the business with ease as per LPA s. 19.

This model would not be ideal where all parties intend to contribute skills and services, in addition to money, which would disqualify each of them from being a limited partner.

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