The Limited Liability of Limited Partners: A Protection to Be Nuanced

One of the main appeals of the limited partnership (“LP”) lies in the limited liability granted to limited partners. In principle, limited partners are only liable up to the amount of their contribution to the common fund, making this structure attractive to investors who wish to support a project without being exposed to the risks associated with management.

What is Meant by the “Agreed Contribution”

In the event the LP’s assets are insufficient, the general partner is jointly liable for the LP’s debts toward third parties. The limited partner, however, is liable only up to the amount of their agreed contribution, even in the case of a transfer of their interest in the fund ¹ .

It is crucial to understand what “agreed contribution” actually means. It does not only refer to amounts already paid into the LP, but also includes any amount the limited partner has committed to contribute (commonly referred to as the agreed contribution), even if that amount has not yet been paid. In other words, a limited partner may be held liable up to the full amount of their commitment, whether or not it has been disbursed at the time a claim arises.

Liability in the Case of Distributed Profits

A limited partner’s liability may also be triggered if they receive a share of the LP’s profits, and that distribution reduces the common fund. In such cases, the limited partner is required to return the amount necessary to cover their share of the resulting deficit, even if they have already fulfilled their initial capital commitment ² .

In other words, as long as the LP does not have sufficient assets to pay its debts following a distribution, the limited partner remains liable up to the full amount of their agreed contribution.

Liability Following Withdrawal or Redemption

A limited partner’s liability does not automatically end upon withdrawal from the LP. When a limited partner transfers their interest to a third party, they remain jointly liable with the transferee toward third parties for any portion of their capital commitment that has not yet been paid ³ .
The same principle applies when the LP redeems the limited partner’s shares: the former limited partner remains liable up to the amount of their commitment, unless it can be demonstrated that, at the time of the redemption payment, the LP had sufficient assets to meet its debts.

In short, a limited partner who has transferred or had their shares redeemed remains liable for obligations arising from their time as a partner, with respect to third parties ⁴ .

Can a Limited Partner Be Liable Beyond the Agreed Contribution?

Although the general rule is that a limited partner is only liable up to their agreed contribution, certain acts or circumstances can void this protection. The Civil Code of Québec provides for three major exceptions in which a limited partner may be held liable beyond their contribution:

1. If the LP fails to include its legal form in its name or in contracts concluded on its behalf ⁵ ;
2. If a limited partner’s name appears in the name of the LP without clearly indicating their status as a limited partner ⁶ ;
3. If the limited partner guarantees the LP’s obligations ⁷ ;
4. Under Article 2244 C.c.Q., if the limited partner participates in the management beyond offering consultative advice, acts as an agent of the LP, or allows their name to be used in partnership documents—actions that result in full liability for the LP’s obligations ⁸ .

Conclusion

The LP offers an attractive framework for passive investors, but the limited liability it provides is subject to strict conditions. The concept of contribution is central to this protection, and its interpretation includes both funds already paid and those promised. Moreover, certain events—such as profit distributions, withdrawal or redemption of units, or unauthorized involvement in management—may extend or increase a limited partner’s liability.

In a forthcoming article, we will explore in greater detail the situations where a limited partner’s liability may exceed their agreed contribution, as well as precautionary measures to preserve the benefit of limited liability.

¹Code civil du Québec, RLRQ c CCQ-1991[C.c.Q.], art. 2246.
² Ibid, art. 2242.
³ André Vautour et Guillaume Lavoie, « Épée de damoclès ou épouvantail ? Jusqu’où l’investisseur dans un fonds d’investissement peut s’impliquer dans ce fonds sans risquer de perdre sa responsabilité limitée ? » Développement récent en droit des affaires, (2016) Cowansville, Y. Blais, vol. 417 et C.cQ. Supra note 1, art. 2246.
⁴ Ibid, art. 2243.
⁵ Ibid, art. 2197.
⁶ Ibid, art. 2247.
⁷ Ibid, art. 2246 al. 2.
⁸ Paul Martel, Société en commandite : l’immixtion des commanditaires dans la gestion est-elle vraiment une source de responsabilité? 2006 – La Revue du Barreau, tome 66; C.c.Q., supra note1, art. 2244.

By Me Roxanne Dupuis