How to Set Up a Limited Partnership in Canada?
Foreign investors who wish to set up their business in Canada have a number of business vehicles to choose from. Among them private corporation is one of the most sought after options. However, there are a number of other business vehicles which can be chosen by the investors depending on their needs. One of the interesting business vehicles adopted by foreign investors is Limited Partnership in Canada because of the tax minimization purposes. This article gives a detailed description of the limited partnerships in Canada and the procedure for setting up such limited partnerships in Canada.
What is a limited partnership in Canada?
A limited partnership in Canada is a form of a general partnership, which is one of the three forms of business structures in Canada. A limited partnership is operated by a single general partner having unlimited liability. Such a general partner is supported by other “limited partners”. The general partner enjoys the major chunk of the earnings of the partnership. Though contribution is made from the other “limited partners” end, they are not involved in the partnership’s management. The extent of liability of the “limited partners” is capped to the amount of capital contributed by them in the partnership.
Characteristics of Limited Partnerships in Canada
Following are the four general characteristics of Limited Partnerships in Canada:
- The limited partnership is supported by a single general partner having unlimited liability. Such a general partner is supported by other “limited partners”.
- The biggest chunk of the earnings made by the limited partnership in Canada go to the account of the general partner because of the increased contributions made and the risk undertaken in the form of unlimited liability.
- The “limited partners” contribute a portion of capital to the limited partnership but are not involved in the management of the limited partnership in Canada.
- The extent of liability of the “limited partners” is limited to the amount of the capital contributed by them in the partnership.
- There are no residency requirements for the general partner.
Features of a Limited Partnership in Canada
Following are the characteristics of the limited partnerships in Canada:
- Operations: A limited partnership in Canada is run by a general partner who has the majority of the ownership in the limited partnership. In a limited partnership in Canada, there are relatively low administration costs and the rules with respect to raising capital are clear cut.
- Accounting: tracking with respect to revenue, cash-flow management, and expenses is done internally and only for a few functions do external assistance is sought.
- Tax returns: There is no need to file separate tax returns for the partnership as each of the partners is taxed personally for his/her share in the partnership. There is no requirement to file corporate tax which means there is no corporate income tax.
- Legal liability: the general partner is responsible and legally liable for all the assets and liabilities of the partnership.
Advantages and Disadvantages of a Limited Partnership in Canada
Important decision making: The general partner of a limited partnership in Canada is the final decision-making authority and limited partners are only informed about the decisions are taken by the general partner.
Public reporting not required: there is no requirement for a full-fledged public reporting of the financial statements of the partnership. Only general-purpose financial information is required in order to run the partnership and to satisfy the needs of the vendors, bankers, tax officials and limited partners.
Limits on expense deductions: there exist some restrictions on the deductions with respect to the expenses. In a limited partnership in Canada, the tax is imposed on the personal tax rates of the individuals.
Limited exposure to the assets of limited partners: as the liability of the limited partners extends to the contributions made by them in the partnership, such limited exposure to the assets becomes an advantage for the limited partners. In a limited partnership in Canada, only the personal assets of the general partner can be seized to settle the legal claims.
Conditions for Opening a Limited Partnership in Canada
The conditions are not stringent for opening a limited partnership in Canada and the persons who are interested in opening a limited partnership can follow the following conditions:
- A limited partnership in Canada needs to have at least two members who can be natural persons or companies.
- One of the members of the partnership shall be the general partner who shall be the legally liable for the partnership’s debts and liabilities.
- Other members will be benefitted from the limited liability of the members
- There is no bar on the minimum capital requirement for a limited partnership in Canada. The partners are free to decide on the contribution they wish to make for the partnership
- There are no restrictions on the income earned from the outside Canada.
Registration of a Limited Partnership in Canada
- The name of a limited partnership shall always contain the legal elements in the name as “Limited Partnership” or “LP”. The name should be either in French or English.
- The limited partnerships in Canada can be registered in a particular province in accordance with the law governing the partnerships of that province. However, from a practical point of view, limited partnerships are formed based on the partnership agreements drafted within the four corners of law.
- In some of the provinces, limited partnerships can be established only for certain kinds of professions such as law, taxation, accounting etc.
- All the necessary information including the registered address regarding the members in a partnership must be provided upon registration.
- The names of the partners are recorded in the Trade Register of the province where the limited partnership is registered.
- Following registration, the partners decide the amount of contribution each partner makes for the partnership.
From the above discussion, it can be concluded that a limited partnership registered in Canada has highly flexible business structure with a simple registration procedure. It further does not mandate the partners to file accounts or to pay any corporate tax for the partners who are resident outside Canada. This makes the structure of Limited Liability very feasible for the entrepreneurs related to IT and web service providers.
Read Our Article: Setting up a Partnership in Canada
Prabhat has done his BA LLB (Hons) and has been writing research papers since his law school days. His interest in content writing made him pursue a career in legal research and content writing. His core areas of interest are indirect taxes, finance and real estate.