Partnership Structures

Three kinds of Partnership structures

In Canada, partnership structures involve the creation of the legal entity known as a "partnership". There are three kinds of partnerships in Canada: general partnerships; limited partnerships; and limited liability partnerships (this last kind is not yet available in all provinces). One of the main reasons to use any kind of partnership is for income tax planning. In a partnership (any kind), profits or losses of the partnership have to be reported by the partners themselves and not by the partnership. (In some cases the partnership has to file a reporting form, but doing so doesn't change the responsibility for paying taxes.) So partnerships are often used as investment vehicles in the investment business or for restaurants or in film development, because any losses can be flowed through to the underlying partners, and set off against other income in the right circumstances.

General Partnerships

Creating a general partnership can be as easy as incorporating, but setting up some general partnerships and all limited partnerships or the limited liability partnerships takes more work than incorporating. The reason for this is the need to draw up a suitable partnership agreement. There's no "one size fits all" kind of agreement. Corporations can be extensively customized as well, but they're much more "off the rack" than the typical partnership.

Limited Partnerships

Because of the unlimited liability that a general partner faces (whether in a general partnership or as a general partner in a limited partnership), general partnerships are not used unless it's not possible or practicable to use another structure (as in some of the professions, such as law or accounting) or unless certain income tax results are wanted that can't be obtained in any other way. It's possible to set up a general partnership where each partner is a corporation, and so reduce (but not eliminate) the liability risk. In a limited partnership, there is a general partner (which is usually a corporation) and one or more limited partners. The limited partners have limited liability (to the extent of their investment in the partnership) for liabilities of the partnership. The general partner has unlimited liability for partnership liabilities. A limited partner who engages in managing the limited partnership will lose that partner's limited liability. Because of this limited liability feature, a limited partnership is often the vehicle of choice for raising money for certain kinds of business ventures.

Limited Liability Partnerships - Fairly New in Canada

Don't confuse a "limited partnership" (which has been around for a long time), with a "limited liability partnership" ("LLP", for short) (which is fairly new in Canada). A limited liability partnership is a general partnership in which liability of even the general partners is limited (not done away with, but limited). Ontario has had LLPs for a few years now. BC had lagged behind, but in 2004 the government finally passed legislation allowing these kinds of entities to be created in BC. This new kind of partnership allows all pre-existing general partnerships or registered limited partnerships to file a designation with the BC Corporate Registry to change into a LLP. Or you can create one from scratch. The benefit of this structure is that it reduces, but doesn't eliminate, the liability that general partners face. If something goes wrong in a LLP, the partnership itself can be sued, and the assets of any particular partner who did something wrong will be at risk. But the assets of the other partners will be protected.

One benefit of the LLP legislation in BC compared to other provinces in Canada is that BC has made LLPs available to all kinds of businesses. Any kind of business may be carried on through a LLP. In other provinces in Canada, LLPs are usually limited to regulated professions, such as lawyers or accountants.

Because of this difference, a BC registered LLP can be a suitable vehicle for international businesses, particularly if the business operates entirely outside of Canada.

Read more about our standard BC LLP registration package

If you think a partnership structure of some kind will be of use for a business situation that you're considering, please give INC Business Lawyers a phone call now to discuss the options.