CALGARY LIMITED PARTNERSHIP LAWYER
Contact Neufeld Legal PC at 403-400-4092 or Chris@NeufeldLegal.com
A limited partnership is a business structure involving at least one general partner with management responsibility and unlimited liability, and one or more limited partners who provide capital and have limited liability, without involvement in daily operations. The business structure of a limited partnership involves at least two types of partners:
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General Partner(s): These partners are responsible for the day-to-day management and operation of the business. Crucially, they have unlimited personal liability for the partnership's debts and obligations. This means their personal assets (like their home, car, and savings) can be used to cover business debts if the partnership cannot. Often, a corporation is set up to act as the general partner to provide a layer of liability protection for the individuals running the business.
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Limited Partner(s): These partners are essentially passive investors. They contribute capital (money, property, or services) to the partnership but generally do not participate in the management or day-to-day operations of the business. In return for this passive role, their liability is limited to the amount of capital they have invested in the partnership. Their personal assets are typically protected from the partnership's debts.
For Calgary-based businesses looking to utilize a Limited Partnership, the essential characteristics of such a partnership arrangement include:
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The requirement of two types of partners: general partners and limited partners.
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Flow-through taxation, for unlike a corporation, the limited partnership itself is generally not taxed. Instead, profits and losses "flow through" to the partners, who report them on their personal or corporate tax returns. The character of the income (e.g., business income, capital gains) also flows through.
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Necessity of a formal written agreement, as a written limited partnership agreement is essential to govern the relationship between partners, outlining capital contributions, profit/loss allocation, management responsibilities, and other key terms.
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Registration requirement, as limited partnerships must be registered with the Corporate Registry in Alberta under the Partnership Act.
From the perspective of a Calgary-based business, a Limited Partnership is an appropriate business structure in specific situations that are capable of realizing the distinct advantages available from a Limited Partnership, including:
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Attracting Passive Investors (Capital Raising): This is one of the primary reasons for structuring one's business as a limited partnership, given that a limited partnership can raise capital from investors who want to contribute funds but don't want to be involved in the management or take on unlimited personal liability. This appeals to risk-averse investors who are looking for a return on their investment without the operational burden or the same level of risk as a general partner.
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Limited Liability for Investors: For the limited partners, the key benefit is that their financial risk is capped at their investment. This is a significant draw, as it protects their personal assets in case the business faces financial difficulties or legal claims.
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Flow-Through Taxation (Tax Benefits): Like general partnerships, limited partnerships are "pass-through" entities for tax purposes. This means the partnership itself does not pay income taxes. Instead, profits and losses "flow through" to the individual partners, who then report them on their personal tax returns. This avoids "double taxation" that can occur with corporations (where the corporation pays tax on its profits, and then shareholders pay tax again on dividends). This can be particularly advantageous in the early stages of a business when losses are anticipated, as partners may be able to use those losses to offset other income.
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Flexibility in Governance and Profit-Sharing: The limited partnership agreement is a crucial document that defines the roles, responsibilities, and profit/loss distribution among partners. This allows for a high degree of flexibility in structuring the partnership to meet the specific needs and desires of all parties. The general partner typically has significant control, while the limited partners are intentionally excluded from the daily decision-making process.
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Specific Industry Applications: Limited partnerships are commonly used in:
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Real estate ventures: Where a general partner manages the property, and limited partners provide funding.
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PPrivate equity and venture capital funds: Where general partners manage the fund and make investment decisions, and limited partners are the investors.
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High-cost startup businesses: Where significant capital investment is needed from multiple parties; which includes film and software production, as well as resource exploration and development.
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Family businesses: For structuring management responsibilities and generational transfers.
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Important Note: A limited partner (of an Alberta limited partnership) can risk losing their limited liability if they take part in the "control" of the business. It is crucial for limited partners to remain passive investors to maintain their limited liability protection. The Alberta Partnership Act governs the formation and operation of limited partnerships. Recent amendments have streamlined the registration process by reducing the amount of public disclosure required for new limited partnerships, aligning Alberta with other jurisdictions and offering more privacy for investors..
Providing strategic legal advice and direction to business partnerships and joint ventures engaged in commercial activities in Alberta, from partnership / joint venture formation to internal governance to contracts and business transactions to dispute resolution. Contact our law firm at Chris@NeufeldLegal.com or 403-400-4092 to schedule a confidential initial consultation for your business partnership or joint venture.