Should You Run Your Business Through a Limited Liability Partnership?
The Limited Liability Partnership
What is a partnership structure? A partnership arises where two or more persons carry on business together for profit. In a general partnership, the partners are exposed to liability by a claimant, whether for breach of contract or negligence. If a claim is successful, a claimant can seek compensation against one partner or against the personal assets of all the partners. While the partnership is a separate legal entity from the partners, the partners have liability for the actions of the partnership in most cases. (This arrangement differs from a corporation, which is separate from its owners with regard to liability.) This follows the principle of joint and severable liability.
A Limited Liability partnership is a type of general partnership structure where each partner’s liabilities is limited to the amount they put into the business. Prior to 1998 it was not possible to limit your liability as a partner. In 1998 the Partnerships Act was amended to allow for Limited Liability Partnerships (LLP’s). With LLPs, the personal assets of the partners who are not negligent are not exposed to claims against errors, omissions, negligence, incompetence, or malpractice committed by other partners or by employees of the firm, just as in a corporation. A claimant can only recover against the partner who has acted negligently. That being said, the law does not reduce or limit the liability of the firm. All of the firm’s assets and insurance protection remain at risk.
LLPs are only permitted in Ontario for the sole purpose of carrying on a profession and that LLP must be governed by an Act that allows an LLP to practise as a profession (for example, in the case of midwives, it is the Midwifery Act, 1991, for accountants it is the Public Accounting Act, 2004).
While any kind of business may be carried on through a LLP, in Canada, LLPs are usually limited to regulated professions, such as lawyers or accountants.
How to Register for a Limited Liability Partnership
When registering for a business name under the Business Names Act, the firm name of a Limited Liability Partnership shall contain the words “limited liability partnership” or “société à responsabilité limitée” or the abbreviations “LLP”, “L.L.P.” or “s.r.l.” as the last words or letters of the firm name.
To register for a LLP, apply to the Ministry of Government Services by completing the Ministry’s Form 6, which can be downloaded from the Ministry’s website. The Ministry certified Form 6 will have a BIN (Business Identification Number) number stamped on it, which will be required for your registration application.
A registration expires in five years and must be renewed with the Ministry. An amendment should be filed within 30 days of the change whenever there is a change in address or change of activity, such as adding or removing a partner. If using an amendment to change partners, at least one of the original partners must remain in the LLP. File a new LLP registration if all partners are changing or if you are changing the name of the LLP is changing. A cancellation should be submitted within 30 days if you stop using the business name.
Advantages of an LLP
While limited liability is one of the most salient advantages, there are other very good reasons to run your company as a partnership. Here is a list of the most compelling reasons to run your business as a partnership:
Fluid Governing Structure
With a partnership and limited liability partnership structure, partners have complete freedom on how the business is governed and structured. With its fluid structure, partnerships do not have to report their activities to anyone and partners can come up with any way they like to manage the organization. This fluid governing structure allows assets and funds to be moved in and out of the business with ease.
Simplified Tax Structure
A partnership and limited liability partnership are pass-through tax entities. A pass-through entity is a special business structure that is used to reduce the effects of double taxation. That means that there is no tax paid at the partnership level. Instead, the partnership’s income is allocated among the partners, who pay income tax at the individual partner’s level. While this simplified structure avoids double taxation, it will be difficult for a high-earning partner to shield his income from a high tax rate.
Excellent Tax Planning Tool
Having a partnership or limited liability partnership is expected to incur losses in its first year can be a great tax planning tool. If you continue to be employed and earn T4 salary income, you can write off your partnership’s start-up costs and pay less tax on income earned through your regular employment.
Lower Cost in the long Run
Setting up a partnership and limited liability partnership with a partnership agreement will incur higher start up costs in the short term; however, in the long run, the costs will be lower as there are no annual tax filings or legal fees incurred on a regular basis.
With all the advantages of running your business entity as a partnership, shouldn’t every business consider this type of structure?
Well, no. Since a limited liability partnership is only available to accountants, lawyers, and doctors, most other business partnerships are not afforded that protection. In fact, since there is no separate liability of a general partnership, each partner is jointly liable for the debts of the business. In summary, while there are many advantages, it is wise to consult with a business-, corporate/commercial-, or tax lawyer to determine if it makes sense for you.
Each of the partners is jointly liable for the debts of the business. Therefore, if a partnership incurs debts greater than its assets, creditors can look at the personal assets of the partners.
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law 2020
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.