Limited partnerships are a common business structure used in British Columbia, quite often in the area of real estate investment and development. They are attractive to investors due to their flexibility, ability to bring multiple entities (e.g. corporations, individuals, other partnerships) under one "roof" as limited partners, the fact that they are tax flow-through vehicles that permit individual tax planning, and the limited liability they afford limited partners.
One of the features that makes limited partnerships so attractive - the latitude that partners have to structure their relationship in a limited partnership agreement with relatively few restrictions imposed by the Partnership Act (British Columbia) (the "Act") – can also be a source of considerable risk for investors.
The purpose of this article is to provide a brief introduction on limited partnerships to investors who are considering investing in a limited partnership and becoming limited partners.
Basic Features of a Limited Partnership
First, some basic facts about limited partnerships. Every limited partnership in British Columbia consists of at least one general partner and one or more limited partners.1 The general partner, usually a corporation, is responsible for the management of the affairs of the limited partnership and accordingly bears unlimited liability in connection with the limited partnership.2 Limited partners, on the other hand, are the "investors" in the limited partnership. They contribute capital or property to the limited partnership. A limited partner's liability is limited to the amount of its contribution to the limited partnership,3 although this limited liability can be lost if takes part in the management of the limited partnership's business.4
Limited partnerships are often misunderstood to be legal entities. Instead, they are really a contractual relationship of partners with a common business purpose. Some people also make the mistake of assuming that limited partnerships are basically structured and governed like corporations. In fact, unlike in corporations, most limited partnerships do not, and are not required to, provided limited partners with a lot of the rights and powers that shareholders in a corporation have.
Limited Partnership Agreements
Details such as the ownership of partnership assets, management of the business of the partnership, capital requirements from limited partners, allocation of profit and loss and distribution of available cash/net profit will all be set out in a limited partnership agreement entered into between the general partner(s) and limited partner(s). Typically, legal counsel for the general partner or initial limited partner (i.e. the party(ies) soliciting investments from other investors / future limited partners) will provide a copy of the limited partnership agreement for review by prospective limited partners and their legal counsel. If an investor does not know what to look for, limited partnership agreements can contain numerous hazards for the unwary.
In our next article, we will discuss some of the most commonly encountered provisions in limited partnership agreements, with a discussion of areas of concern for investors.
1. Partnership Act, RSBC 1996, c 348, s. 50(2).
2. Ibid, s. 56.
3. Ibid, s. 57.
4. Ibid, s. 64.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.