The Limited Partnership: A Valuable Legal and Tax Tool
A limited partnership (“LP“) is a form of partnership that offers an interesting hybrid structure, both legally and fiscally. It is often chosen for large-scale projects, particularly in real estate or in the context of investment partnerships.
What Are the Key Features of a Limited Partnership?
The LP is a partnership within the meaning of the Civil Code of Québec. Unlike a corporation, an LP does not have a separate legal personality. However, doctrine and case law recognize that it possesses a distinct patrimony separate from that of its members, which helps to limit the liability of the limited partners.
It is characterized by a dual structure of partners:
- General Partners: They are the managers of the LP. They have the authority to manage and bind the LP. The fact that the LP has a distinct patrimony means that creditors must first seek payment from the LP’s assets. Only if these assets are insufficient may the general partners be held personally liable, and then jointly and severally. At least one general partner is required to validly form an LP, and there is no requirement for a plurality of general partners.
- Limited Partners : They contribute financially to the LP’s common fund but do not participate in management. Their liability is limited to the amount of their agreed contribution.
This limited liability is a notable advantage. However, it is not absolute: if a limited partner participates in the management of the LP or publicly acts as if they were a general partner, they risk losing the benefit of this protection and becoming personally liable to third parties. It is therefore essential that limited partners maintain their role as passive and consultative investors to preserve their limited liability.
How Is an LP Formed ?
An LP is created through a partnership agreement entered into between the general and limited partners. This agreement must be in writing and must outline the main operating rules, including each partner’s contribution, the terms for sharing profits and losses, and the respective powers and responsibilities of the parties.
The LP must also be registered with the Québec Enterprise Registrar. It is subject to the general provisions on partnerships found in the Civil Code of Québec, as well as the specific provisions applicable to limited partnerships.
What Makes It More Advantageous in Certain Cases ?
Several features make the LP particularly attractive :
- Limited liability : Limited partnerxs benefit from limited liability similar to that of shareholders in a corporation.
- Administrative flexibility : An LP is generally less complex to manage than a corporation.
- Tax advantages : From a tax perspective, the LP is not considered a “person”. Therefore, it is not required to file a corporate income tax return. The LP’s profits or losses are directly attributed to the partners, allowing for tax optimization, especially in terms of loss deductions.
- Financing tool : LPs are especially favored for real estate and infrastructure projects, enabling limited partners to invest without participating in management and while limiting their exposure to business risks.
In summary, the limited partnership is an effective and flexible legal vehicle, ideal for partnerships where some members wish to invest without actively managing the enterprise. However, setting up an LP requires a careful analysis of the parties’ objectives and rigorous legal structuring.
1 Code civil du Québec, RLRQ c CCQ-1991[C.c.Q.].
2 Laval (Ville de) c. Polyclinique médicale Fabreville, s. e.c. 2007 QCCA 426; Bernard c. Leprechaun , s.e.c., 2012 QCCS 5186; Bernard LAROCHELLE et Charlaine BOUCHARD, Contrat de société et d’association, 3e éd., Montréal, Wilson & Lafleur, 2012, p. 21.
3 C.c.Q., supra, note 1, art. 2236.
4 Ibid, art. 2246.
5 Ibid, art 1830 et ss; art 1871 à 1888.
6 Loi de l’impôt sur le revenu, LRC 1985, c 1 (5e suppl), art. 248(1) « personne ».
7 Jean Potvin, « Fiscalité des sociétés de personnes », dans Association de planification fiscale et financière, Congrès 1992, Montréal, p. 423, aux pages 426 et 427.
By Me Roxanne Dupuis