Limited partnerships may be formed to carry on any business that a general partnership may carry on. They consist of at least one general partner and at least one limited partner. Interestingly enough, a person may be a general partner and limited partner at the same time in the same limited partnership (Limited Partnerships Act, R.S.O. 1990, c. L.16 [“LPA”], s. 5(1).).
Contrary to general partnerships where all partners are liable for the obligations of the partnership, in a limited partnership, the general partner is liable for the partnership obligations while the liability of each limited partner is limited to the amount of money or other property that partner contributes (LPA, s. 9). It should be noted that when a limited partner ceases to be a limited partner, it will have the same obligations of a general partner. Also, in a general partnership, any partner can conduct the usual business of the partnership, while in a limited partnership, the limited partner has a passive role and the general partner must manage and control the business. Therefore, a limited partner is essentially a passive investor (rather than an active participant) in the operation of the partnership. This is why a limited partnership is often used as a channel for passive investment as it provides a flow through of gains and losses to the limited partners, while offering them limited liability.
Limited partners share the profits in proportion to their contributions. This can be changed by a limited partnership agreement that includes a provision providing priority as to the profits to one or more of the limited partners. A limited partner may contribute money or property to a limited partnership, but may not provide services (LPA, s. 7(1)). A limited partner is entitled to the return of his, her or its contribution in the following circumstances: at the dissolution of the partnership; at the time specified in the limited partnership agreement; after six months’ written notice to all partners if the agreement is silent; or when all partners consent to the return of the contribution (LPA, s. 15(1)). However, in order for the contributions to be returned, there must be sufficient assets to pay all liabilities of the limited partnership, except liabilities owing to general partners and to limited partners for their contributions, and the partnership agreement must be terminated or amended (if necessary) to reflect the reduction in the contribution being returned (LPA, s. 15(2)).
The rights, duties and liability of the general partner in a limited partnership are generally the same as those of any partner in an ordinary/general partnership (LPA, s. 8). As general partners have unlimited liability regarding the debts of the limited partnership, general partners are usually corporations so they can take advantage of the limited liability component of a corporation. Section 8 of the LPA provides that general partners require written consent or ratification by all of the limited partners for the following:
do any act in contravention of the partnership agreement;
do any act which makes it impossible to carry on the ordinary business of the limited partnership;
consent to a judgment against the limited partnership;
possess limited partnership property, or assign any rights in specific partnership property, for other than a partnership purpose;
admit a person as a general partner;
admit a person as a limited partner, unless the right to do so is given in the partnership agreement; or
continue the business of the limited partnership if a general partner dies, retires or becomes incapable as defined in the Substitute Decisions Act, 1992 or a corporate general partner is dissolved, unless the right to do so is given in the partnership agreement.
It is advisable to have a written limited partnership agreement in place so the partners have an agreement that reflects what they desire. Limited partners often want to achieve the flexibility that corporations have, and with a carefully drawn out agreement, they can. Without a limited partnership agreement, the LPA will govern the parties.
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