Introduction
Are you starting a business related to law, accounting or medicine? These high risk fields often operate as a “Limited Liability Partnership” (LLP). This structure allows partners to limit some of their risk for the actions of their partners in the business.
What is a Partnership?
‘Partnership’ is the relation that subsists between persons carrying on a business in common with a view to profit. A partnership is not a separate entity like a corporation. This means that if the organization incurs a debt or liability, the partners will be jointly and severally liable. Being jointly and severally liable means that a claimant can sue just one or some of the partners, and each partner alone or together would be fully responsible to pay. It would then be up to the partners to figure out among themselves how to share responsibility for the claim. It is possible that the partners may split the liability evenly but a situation could also occur where the one partner has to take it all upon himself.
How does a Limited Liability Partnership Differ?
A limited liability partnership is formed of at least one general partner and limited partner. The general partner(s) will be jointly and severally liable for the partnership as any partner would be in a general partnership. On the other hand, the advantage of becoming a limited partner is the range of protections that provincial legislation offers. Broadly speaking, a limited partner is protected from liabilities affecting the partnership arising from other partners in the partnership, due to no fault of their own.
There are two classified types of protection that vary among provinces: a partial shield and a full shield.
Partial Shield
A partial shield protects the limited partner from liability of the partnership arising from other employees of the partnership in the provision of professional services. The specific acts that are covered by a partial shield are negligence, wrongful acts or omissions, malpractice or misconduct. However, this does not protect the limited partner from contractual claims against the partnership. Moreover, supervisors for employees may be held liable for inadequate control over their subordinates if they cause the firm to suffer a liability.
Provinces that provide a partial shield protection to limited partners in LLPs include Ontario, Alberta, Québec, Manitoba and Nova Scotia. It is important to note Ontario has a narrower range of protection than the other provinces.
Full Shield
A full shield protects the limited partner from all claims against the partnership. They are not liable to the partnership by virtue of a being a partner but still liable if liability arises from their own mistake.
Provinces that provide a full shield protection to limited partners in LLPs are the following: BC, New Brunswick and Saskatchewan.
Currently, only P.E.I. is the only province that does not allow LLPs.
Limited Liability Partnership in Ontario
The partial shield protection in Ontario is narrower than the typical partial shield protection. In Ontario, limited partners are protected from claims of negligent acts or omissions against their firm that they did not commit. If we contrast this protection with those granted by other provinces, Ontario does not protect the limited partner from claims of malpractice, misconduct or any acts going beyond negligence. Moreover, the same restrictions apply whereby any supervisor may be held liable for inadequate control over their employees.
Conclusion
Limited liability partnerships provide mitigation and security for those who work in high risk professions. Although provinces in Canada vary on how much Limited Liability Partnership protect their limited partners, the fact remains that a degree of protection is available. It also means that those in Limited Liability Partnership should be aware of the limitations on the protection that their province provides.
Takeaways
- A partnership is a relationship among partners, not a separate entity
- The level of protection for a partner in an Limited Liability Partnership depends on jurisdiction
- Seek professional advice on the best structure for your partnership or business, and for advice on how Limited Liability Partnership’s are regulated in your province