A limited partnership is a form of general partnership, which is one of three ways of organizing a business in Canada: The other two are sole proprietorship and incorporation. Each of these has its own operational, accounting, tax and legal requirements.
There are four characteristics that distinguish a limited partnership from a general partnership:
- It is operated by a single general partner with unlimited liability, supported by other “limited partners.”
- The single general partner gets a bigger share of the earnings in exchange for increased contributions and risk.
- The limited partners contribute capital but cannot be involved in the company’s management.
- The liability of the limited partners is capped by the amount of capital they contribute.
In some provinces, limited partnerships are available only to groups of professionals such as lawyers, consultants or doctors.
Limited partnerships are relatively simple and inexpensive to form. When creating a limited partnership, a partnership agreement is essential to clarify management accountability, ownership and profit distribution.
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The company is run by the single general partner with majority ownership. A limited partnership has relatively few operational formalities, low-to-mid-range administration costs and clear rules for raising capital.
Important decisions are made by the general partner, with the limited partners kept informed.
Revenues, expenses and cash flow management are all tracked internally with additional outside support for other accounting functions.
Public reporting is not required. General-purpose financial information is needed to run the company and satisfy the needs of bankers, vendors, tax collectors and the limited partners.
There is no need to file a separate tax return for the partnership. Each partner is taxed personally on his/her share.
A limited partnership has some limits on expense deductions. Taxable income is subject to the personal tax rates of the individual.
The general partner is liable for the full assets and liabilities of the partnership.
Limited exposure for the limited partners is an advantage. Only the personal assets of the general partner can be seized to settle legal claims.
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