LIMITED LIABILITY PARTNERSHIPS

1
LIMITED LIABILITY PARTNERSHIPS

• A Review of Legal Issues
• By
• John E. Rogers, of
• Burns, Fitzpatrick, Rogers Schwartz

2
A. Definition of Partnership

• Section 2 Partnership is the relation which
  subsists between persons carrying on business in
  common with a view of profit (exists without the
  requirement to register a certificate unless the
  business is trading, mining or manufacturing).
• Section 7 The acts of every partner who does any
  act for carrying on in the usual way business of
  the kind carried on by the firm of which he or
  she is a member bind the firm and his or her
  partners, unless
• (a) the partner so acting has in fact no
  authority to act for the firm in the particular
  matter, and
• (b) the person with whom he or she is dealing
  either knows that the partner has no authority,
  or does not know or believe him or her to be a
  partner.

3
B. Types of Partnerships

• 1. General Partnership see definition above.
  Most common form of partnership for professionals

4

• 2. Joint Venture
• Another form of General Partnership.
• BUT, most Joint Venture Agreements state that the
  participants are not partners and exclude
  liabilities of partnership.

5

• 3. Limited Partnership
• Requires one or more General Partners and one or
  more Limited Partners (Section 50)
• Created by filing a specified certificate under
  the Partnership Act.
• Requires a written partnership agreement.
• The Limited Partners have no personal liability
  unless they participate in the management.
• The General Partner signs for the Limited
  Partnership if granted authority to do so under
  the Partnership Agreement. (Section 78 (3)).
• Used most frequently for time limited single
  purpose ventures and tax shelters where flow
  through of gains and loses for tax purposes is
  important.

6

• 4. Limited Liability Partnership (LLP)
• Created by Registration (Section 96).
• May be provincial or extra-provincial.
• Most other aspects of the Partnership Act apply
  to LLP (but this is misleading as it is really
  like a company).
• Similar to LLCs in U.S. jurisdictions..flow
  though entities for tax purposes.
• Has many of the characteristics of a limited
  liability company.

7
C. Liability of Partners

• 1. General Partners
• Section 11 A partner in a firm is liable
  jointly with the other partners for all debts and
  obligations of the firm incurred while he or she
  is a partner, and after his or her death his or
  her estate is also severally liable in a due
  course of administration for those debts and
  obligations, so far as they remain unsatisfied,
  but subject to the prior payment of his or her
  separate debts.
• BUT WATCH FOR
• Section 20 A continuing guaranty or cautionary
  obligation given to a firm or to a third person
  in respect of the transactions of a firm is, in
  the absence of agreement to the contrary, revoked
  as to future transactions by any change in the
  constitution of the firm to which, or of the firm
  in respect of the transactions of which, the
  guaranty or obligation was given.
• AND
• Section 5 If you loan money to a firm with the
  rate of return contingent on the profits of the
  firm and the firm becomes insolvent and cannot
  pay 100 cents on the dollar, you are postponed to
  all other creditors until they are paid.

8

• Joint Liability is when two or more persons are
  both responsible for a debt, claim or judgment.
  It can be important to the person making the
  claim, as well as to a person who is sued, who
  can demand that anyone with joint liability for
  the alleged debt or claim for damages be joined
  in (brought into) the lawsuit with them.
• Partners in a regular/general partnership are
  jointly liable for all debts.

9

• 2. Limited Partners
• Section 57 .. a limited partner is not liable
  for the obligations of the limited partnership
  except in respect of the amount of property he or
  she contributes or agrees to contribute to the
  capital of the limited partnership.
• The General Partner has the same full liability
  as a partner in a General Partnership.

10

• 3. Limited Liability Partners
• Section 95(2) Regular liability of partners
  does not apply to Limited Liability Partners.
• Limited Liability Partner
• is not liable for partnership debts
• is liable for his/her own negligence
• is liable for negligence of employees and other
  partners if he/she knew of the problem and did
  not take reasonable steps to prevent it and
  otherwise
• Liability is limited to only the assets in the
  firm (see Section 104).

11

• This is the full shield version of limited
  liability for partners.
• Section 104 is copied from the Model Act
  published by the Uniform Law Conference of
  Canada. The commentary by the Conference states
• It will be noted that the introductory words of
  subsection (1) are "Except as expressly provided
  in this Part, another Act. It does not say,
  "except as expressly provided in this Act." Thus,
  provisions in other Parts of the Partnership Act
  that expressly impose personal liability on
  partners do not override the liability
  protections provided in subsection (1).

12

• When you add the provisions of Section 105,
  Limited Liability Partners have fewer liabilities
  than directors of corporations although they do
  have liability for employee wages, tax deductions
  at source, etc.

13

• Extra-Provincial LLPs All partners of an
  extra-provincial LLP that is carrying on business
  in B.C. but not registered under the Act are
  jointly personally liable as if they were General
  Partners (Section 114).
• This is good for the Bank but bad for the LLP.

14

• Note A partner in an LLP can take part in the
  management of a LLP without losing his/her
  limited liability whereas a limited partner in a
  Limited Partnership can not!

15
D. Rules Relating to Professional Partnerships
16

• There are few rules established by professional
  associations.

17
E. Legal Issues in Partnerships

• The Law Society requires the following notice to
  clients of firms converting to a LLP
• The partners in a limited liability partnership
  are not personally liable for the negligent acts
  or omissions of another partner or an employee
  unless the partner knew of the negligent act or
  omission and did not take reasonable steps to
  prevent it. Each partner is personally liable for
  his or her own actions, and the partnership
  continues to be liable for the negligence of its
  partners, associates and employees. Accordingly,
  there is no reduction or limitation on the
  liability of the partnership.

18

• What it does not say is that the partners are no
  longer liable for the debts or obligations of the
  partnership. More candidly, the Benchers have
  stated
• A limited liability partnership structure
  shields an individual partner from personal
  liability for the debts of the partnership or for
  negligence and wrongdoing of other partners,
  except to the extent of the partners share in
  the partnerships assets. Individual partners
  continue to incur personal liability for their
  own negligence or wrongful acts and those of the
  persons they directly supervise or control.

19
F. Comments

• LLP partners have full shield protection from
  partnership debts like shareholders of a
  corporation.
• In dealing with an LLP
• treat it like a corporation.
• BUT you must read the Partnership Agreement and
  confirm its status a registered LLP.
• All partners should sign guarantees of the LLP
  loans.
• Obtain certificate of parties signing for the LLP
  that they have power to bind the partnership.
  This can be in the loan document.

20

• In some respects, a partner of a LLP is more
  protected than a shareholder/director of a
  Limited Liability Company.
• If we add in a Personal Law Corporation as the
  partner of the LLP, the limitation on personal
  liability becomes even more complete.
• Professional societies do not require their
  members who are LLP partners to agree to
  liability to third parties other than for
  professional negligence.
• Question Would anyone other than the firm be
  liable for an opinion signed McCarthys LLP or
  an undertaking?