We frequently receive requests from clients to set up a limited partnership as a financing vehicle where passive investors contribute capital in furtherance of a project. A limited partnership is a type of partnership structure frequently used to raise capital for different types of projects. They can be used in a variety of sectors though we see them most frequently in connection with real estate acquisitions. They are popular due to their unique legal and tax characteristics. When set up correctly, limited partnerships combine the limitation of liability afforded to a corporation’s shareholders with the income and loss flow through treatment of general partnerships.
Though limited partnerships are one of the oldest financing vehicles, their popularity has only risen relatively recently due to statutory reforms making them more accessible. Limited partnerships cannot arise through conduct alone – they are purely ‘creatures of statute’ as we like to say in the legal profession. In Ontario, the relevant statute is the Limited Partnerships Act (Ontario) (the “LPA”).
Though the LPA is the primary statute relating to limited partnerships in Ontario, it is not a comprehensive code. Legislation pertaining to general partnerships, as well as common law and equitable principles are frequently applicable to limited partnerships.
The defining characteristics of a limited partnership is that it has one or more “general partner” who is actively involved in the management of the limited partnership’s business and who has unlimited liability for the limited partnership’s activities. The financing aspect of a limited partnership is achieved by having one or more “limited partners” who receive units in the capital of the limited partnership in exchange for their financial investment. The liability of a limited partner is limited to their financial contribution as long as they are not involved in the management of the partnership and provided that the requirements of the LPA relating to limitation of liability are complied with.
To form a limited partnership, a declaration of limited partnership Form 5306E must be filed with the Ontario Ministry of Public and Business Service Delivery specifying who the general partner is, the name of the limited partnership, and its date of formation, among other details. In addition, a limited partnership agreement must be entered into between the general partner(s) and the limited partners.
A limited partnership agreement is a private contract that does not need to be filed in a public registry. This agreement outlines various details relating to the limited partnership such as its:
- Purpose – why is the limited partnership being created?
- Capital structure – what classes and series of units are authorized? What are their characteristics?
- Distribution of profits – how will profits be distributed?
- Management of the project – how will the project be managed? Will an external manager be retained to oversee the project?
- Matters requiring special approval – what decisions, if any, require special approval of the limited partners?
- Admission of additional limited partners – how will the admission of new limited partners be dealt with?
This is by no means an exhaustive list. A limited partnership agreement should be tailored to the project’s specific needs.
The capital of a limited partnership may be structured in any number of classes and series of units. This makes limited partnerships flexible enough to permit different classes of investors to join the limited partnership at different times and to have different rights such as the preferential return of capital.
If you are considering a limited partnership to finance your next project and would like to know more, please contact one of our corporate lawyers to schedule a consultation.
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DISCLAIMER: This article is for general information purposes only and is not (and should not be construed as) legal advice. All of the foregoing is subject to legal and accounting advice based on the particular circumstances of each potential client.
 Lyle R Hepburn, Limited Partnerships (Toronto: Thomson Reuters, 1984) (loose-leaf updated 2012, release 5), ch 1 at 1-1.