Aboriginal Entrepreneur Law – The Limited Partnership (“LP”)
by: Garnet Brooks
(As featured in the Mi’kmaw & Maliseet Newspaper – Atlantic Canada)
With an increase in Aboriginal entrepreneurship in Canada, there is an increasing desire for entrepreneurs at all stages to become more informed on the basic legal concepts which concern them and their respective businesses. There are legal consequences to owning and operating a business. There are also unique considerations that are particular to being a status Indian entrepreneur in Canada that should be made by Aboriginal entrepreneurs.
Garnet Brooks is a business lawyer, an experienced entrepreneur and Aboriginal. He practises law with a focus on business and entrepreneur clients in Halifax. Garnet writes “Entrepreneur Law” articles in order discuss and bring awareness of some of the important legal issues entrepreneurs may encounter as they venture into the world of business.
In previous articles I discussed the sole proprietorship and general partnership business structures, which are commonly utilized by new small business entrepreneurs who are starting out. This article will discuss the limited partnership structure, which is a step up in terms of complexity. This structure is often used when there are more specific goals with respect to facilitating certain investment structures and / or tax planning needs. First Nations may also utilize the limited partnership vehicle as part of their overall economic development set-up, which could be structured to achieve significant tax benefits and also to gain the limited liability protection offered through this structure. This article will not delve into specific details of tax or liability planning. Those items would be more appropriately discussed in the context of specific legal advising. This article will discuss some general characteristics of a limited partnership, and what distinguishes a limited partnership from a general partnership, or other business structure.
The Limited Partnership (“LP”)
Limited partnerships may carry on any business that a general partnership may, and offers the benefit of limited liability to some partners known as “limited partners”. For this reason, this business structure is commonly used in partnerships in which a passive investment vehicle is desirable for some 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 Nova Scotia 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, because 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 in Nova Scotia is created 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.
To discuss if this, or a different business structure is most appropriate for your business venture, feel free to contact Garnet Brooks.
This article was intended to be a brief and general discussion, and is NOT intended to be legal advice. As each situation varies, and it is recommended that entrepreneurs seek the advice of a properly qualified lawyer. This will help entrepreneurs to be more informed, and better equipped to make decisions that will help them avoid potentially costly mistakes as they move forward toward achieving their business dreams and goals.