Duhaime's Law Dictionary


Limited Partnership Definition:

A partnership with at last one general partner and a limited partner, the latter contributing financially or otherwise but not otherwise involved in the business or, generally, personally liable for the debts of the partnership.

In Lehndorff, Justice Farley of the Ontario Court wrote:

"A limited partnership is a creation of statute, consisting of one or more general partners and one or more limited partners. The limited partnership is an investment vehicle for passive investment by limited partners.

"It appears to me that the operations of a limited partnership in the ordinary course are that the limited partners take a completely passive role (they must or they will otherwise lose their limited liability protection which would have been their sole reason for choosing a limited partnership vehicle as opposed to an "ordinary" partnership vehicle).

"The limited partners leave the running of the business to the general partner and in that respect the care, custody and the maintenance of the property, assets and undertaking of the limited partnership in which the limited partners and the general partner hold an interest."

Sometimes, and properly, called a limited liability partnership. However, in some jurisdiction, the term limited liability partnership has been taken and used to define a partnership arrangement distinct from a limited partnership or restricted to professional partnerships, as the case may be. In a traditional limited partnership, a general partner remains personally liable for the tort and contractual liabilities of the business. In some of the so-called limited liability partnerships created by statute, and usually restricted to professionals such as doctors, achitects or lawyers, personal liability extends to none of the partners.

With that note of caution, in a limited partnership, subject to the provisions of partnership statute in specific jurisdictions, and to the terms of any partnership contract, a limited partner risks, in the event of the economic failure of the business for which the partnership exists, only losing his/her commitment of capital.

For the typical limited partner, the partnership is merely a "passive investment". The limited partner remains passive or silent.

Indeed, under the terms of most partnership legislation, and to protect the public and keep the partnership transparent,  if a limited partner interferes with the running of the business, they risk losing their limited partner status with consequential personal exposure to the debts of the partnership.

The general partner remains personally liable for the debts of the partnership but also generally retains exclusive authority to operate and manage the business; whereas the limited partner may be able to access some of the profits of the partnership depending on the terms of the partnership contract and, possibly, a share of the assets of the partnership in the event of dissolution.

Limited partnership agreement vary greatly in their terms as prospective partners seek to fine-tune their arrangement to the particular circumstances and skills or other contributions of the limited partner(s).

Most jurisdictions have partnership legislation that sets out the limits of such agreements.

In the case of professional partnerships, such as between lawyers, doctors or other professionals, specific legislation often exists further limiting the creativity of the partnership agreements.

In Backman v Canada, the Canadian Federal Court of Appeal held that:

"A limited partner does not become liable as a general partner unless, in addition to exercising his rights and powers as a limited partner, he takes part in the control of the business.

"In the ordinary case, a limited partnership will consist of a general partner that will control the business and limited partners who will have made financial or other contributions but who will not be actively involved in the business. However, that obviously does not mean that the limited partnership is not carrying on a business. The business is being carried on in common by all the partners, but is controlled by the general partner."

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