Understanding and Working with Limited Liability Partnerships Alison Oxtoby Current to: November,2006 Posted: Friday, November 17, 2006 I. Introduction There are three types of partnership that may be formed under BC law: general partnerships, limited partnerships, and limited liability partnerships. This paper will cover the newest and leastknown of these: the limited liability partnership. While still relatively uncommon in BC outside of legal and accounting firms, the limited liability partnership promises to become a significant feature in our legal landscape. Limited partnerships are covered in a separate paper by the author prepared for the Continuing Legal Education Society of BC. The limited liability partnership provisions in BC are set out in Part 6 of the Partnership Act, R.S.B.C. 1996, c. 348 (the Act ). All references in this paper to parts, sections and subsections that do not contain a specific statutory reference are references to the Act. II. Comparing Limited Liability Partnerships with General Partnerships Limited liability partnerships are hybrid business entities that closely resemble general partnerships, but whose members enjoy limitations on personal liability that may be analogous to those enjoyed by shareholders of corporations. In particular, the partners in a limited liability partnership are not subject to personal vicarious liability for the malpractice liabilities of the firm merely because they are members of the firm. Only those partners who are personally implicated in wrongful acts or omissions are subject to unlimited personal liability. Limited liability partnerships are first and foremost a form of partnership. Limited liability partnerships cannot be created out of nothing; rather, the provisions in the Act grant limited liability status only to pre-existing partnerships. When considering the nature of a limited liability partnership, one should always bear in mind the meaning of a partnership as it was established under common law and then encoded in s. 2 of the Act as follows: Partnership is the relation which subsists between persons carrying on business in common with a view of profit. The word relation is key to this definition. It emphasizes a fundamental aspect of the traditional common law approach to partnership: a partnership is not a separate entity distinct from its members; it is simply a legal characterization of their relationship. Other significant characteristics of a general partnership are that, absent any provision to the contrary in a partnership agreement, all partners may take part in the management of the partnership and its business and each of the partners has the authority to bind the partnership or act as its agent. Perhaps most significantly for our purposes, the partners are jointly and severally liable for all partnership obligations, whether in contract or in tort.[1] The key sections of the Act dealing with the liability of a general partnership and its partners are ss. 12 and 14, which state: Liability of firm 12. If, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his or her partners, loss or injury is caused to any person who is
not a partner in the firm or any penalty is incurred, the firm is liable for that loss, injury or penalty to the same extent as the partner so acting or omitting to act. Liability under 2 preceding sections 14. A partner is jointly and severally liable with his or her partners for everything for which the firm, while he or she is a partner in it, becomes liable under either section 12 or 13. As we shall see below, the legislative provisions that create and govern limited liability partnerships have significantly narrowed this liability, but in virtually all other respects, a limited liability partnership is identical to a general partnership. III. History A. Common Law History While the limited liability partnership may be said to be a special form of partnership, the concept is unknown at common law and therefore has no common law history. Nevertheless, it is important to note that this form of partnership is also subject to most of the other provisions of the Act[2] and to the rules of equity and of common law applicable to partnerships in so far as these are not inconsistent with the express provisions of the Act.[3] B. Legislative History The limited liability partnership is a relatively young creation. It was first introduced in the state of Texas in 1991 and rapidly spread throughout the US. By 1997 virtually every American state had limited liability partnership legislation. As one author noted: After its birth in Texas in 1991, the limited liability partnership propagated throughout the rest of the United States at legislative light speed.[4] The speed with which the limited liability partnership spread had much to do with the forces behind its inception. The drive to create the limited liability partnership was led by large legal and accounting firms in response to the insurance crisis which had gripped the US, Canada and many other nations at the time. As the Alberta Law Reform Institute noted in its final report on Limited Liability Partnerships in 1999,[5] the thought of vicarious personal liability for the malpractice liabilities of one s partnership is not particularly troubling to a partner involved if adequate liability insurance is available at a reasonable price. Through the mid-1980s this was the case, and unlimited liability for professionals was not a major issue. However, in the mid-1980s, many countries experienced an insurance crisis marked by dramatic reductions in coverage and significant increases in premiums for any coverage that was available. By the late 1980s, it became impossible for many professional partnerships to obtain sufficient insurance coverage, and thus the real push for limited liability began. The limited liability partnership was created in response to assertions from those in certain professional fields who argued that it was unfair that they be required to practise in unlimited liability firms with insufficient or expensive insurance coverage when most businesses were carried on through limited liability firms. Ontario was the first Canadian province to introduce limited liability partnership legislation in 1998,[6] however, as we will see below, its liability shield is narrower than many US jurisdictions and other Canadian provinces who adopted the limited liability partnership later. The limited liability partnership is a relatively recent addition to BC law. Part 6 of the Act, which governs limited liability partnerships, took effect on January 17, 2005.[7] IV. Key Issues A. Limited Liability
1. Partial Shield v. Full Shield Protection The general principle behind limited liability partnerships is that they offer those involved the traditional benefits of partnership together with statutory limitations on personal liability; however, being creatures of statute, the extent of the limited liability protection varies significantly from jurisdiction to jurisdiction. The limited liability partnership legislation introduced in Texas in 1991 only protected members from personal vicarious liability for liabilities of the firm arising from negligent or otherwise wrongful acts or omissions of other members or employees of the firm in the provision of professional services. Members remained liable for the partnership s ordinary contractual obligations. All American states that adopted limited liability partnership legislation between 1991 and 1995 adopted this partial shield approach. In 1995, Minnesota enacted a full shield model of limited liability partnership, granting partners limited liability analogous to that enjoyed by the shareholders of a corporation. Most American states which have introduced limited liability partnership legislation since then have followed suit. Jurisdictions with limited liability partnerships fall into two categories: (a) Partial shield jurisdictions, in which the liability protection afforded to partners extends only to malpractice liabilities, leaving the partners exposed to contractual claims against the partnership; and (b) Full shield jurisdictions, in which the liability protection afforded to partners extends to all claims against the partnership, whether based on malpractice, breach of contract or general tort liability. Ontario and Alberta adopted partial shield legislation in 1998 and 1999, respectively.[8] Manitoba, Nova Scotia and Quebec have all followed their lead. In Ontario, the liability shield is in fact narrower than that adopted by American partial shield jurisdictions. Rather than protecting partners from vicarious liability for malpractice liabilities generally (the language typically used in other Canadian partial shield jurisdictions is negligence, wrongful acts or omissions, malpractice or misconduct ), the Ontario statute only shields partners from vicarious liability for negligent acts or omissions. [9] Presumably, the partners of an Ontario limited liability partnership remain subject to liability for the wrongful actions of a partner or employee that go beyond negligence, such as fraudulent misrepresentation or criminal misconduct. As in the American partial shield jurisdictions, neither the Ontario nor the Alberta legislation protects a partner from liability arising from the partner s own negligence or the negligence of a person under the partner s direct supervision or control. The Uniform Law Conference of Canada, in considering the issue of partial shield versus full shield legislation in 1999, noted that the partial shield approach may be supported on the basis that it fully responds to the concerns of the professions that had been pressing for limited liability partnership legislation. Those professions (largely legal and accounting firms) had expressed concerns about excessive exposure to malpractice claims, not to ordinary contractual obligations. On the other hand, commentators have noted that there is little policy reason for distinguishing between malpractice liabilities and general tort liability and contract debts, particularly when those professions seeking limited liability protection are not engaged in any business which is particularly risky from a general tort or contract claims point of view.[10] BC s limited liability partnership regime has adopted the full shield model, as have Saskatchewan and New Brunswick. In implementing its limited liability partnership regime, BC has largely followed the Uniform Law Conference of Canada s Model Limited Liability Partnership Act published in 2000, which contemplates full shield liability protection for both professional and non-professional partnerships. The key section of the Act granting limited liability status is s. 104(1), which states:
104(1) Except as provided in this Part, in another Act or in a partnership agreement, a partner in a limited liability partnership (a) partner, is not personally liable for a partnership obligation merely because that person is a (b) is not personally liable for an obligation under an agreement between the partnership and another person, and (c) is not personally liable to the partnership or another partner for an obligation to which paragraph (a) or (b) applies. Partnership obligations is very broadly defined to mean any debt, obligation or liability of a partnership, other than debts, obligations or liabilities of partners among themselves or as among themselves and the partnership. [11] The significance of the difference between full shield and partial shield legislation is highlighted in the recent decision of the BC Court of Appeal in 3464920 Canada Inc. v. Strother, 2005 BCCA 385, which involved a claim against a large, well-known Vancouver law firm by one of its former clients. The claim was based on a breach of duty as opposed to negligence. Of course, BC did not have any limited liability partnership legislation at the time, and either partial or full-shield protection would no doubt have affected the legal analysis; however, it is easy to see how the exclusion of breach of duty from partial shield legislation could have had a significant effect on the outcome. 2. Exceptions to Limited Liability Protection a. Partnership Assets One thing that is common to all limited liability partnerships is that partnership assets are not shielded from liability. In BC, s. 104(3) provides that the protection set out in subparagraph (1) does not protect a partner s interest in the partnership property from claims against the partnership respecting a partnership obligation. This language is almost identical to that found in the Model Limited Liability Partnership Act. In the commentary provided with the model provision, the Uniform Law Conference of Canada has indicated that this statement may be necessary given the traditional common law relationship-model of partnership law, under which it might be argued that if a partner is not personally liable for a partnership obligation then that partner s interest in the partnership property is not subject to proceedings to enforce the partnership obligation. b. Previous Obligations The limited liability afforded to the partners of a limited liability partnership is only applicable to post-transformation liabilities. It will not limit the liability of the partners in respect of any partnership obligation that arose before the partnership became a limited liability partnership, or that arose out of a contract entered into before the partnership became a limited liability partnership.[12] c. Negligent Acts or Omissions In BC, s. 104(2) provides that registration as a limited liability partnership will not relieve partners from personal liability for: (a) the partner s own negligent or wrongful act or omission, or (b) the negligent or wrongful act or omission of another partner or an employee of the partnership if the partner seeking relief (i) (ii) knew of the act or omission, and did not take the actions that a reasonable person would take to prevent it.
Paragraph (a) does not represent a change to the existing laws in BC. Paragraph (b) is new. As there is not yet any case law on this issue, it is unclear what level of due diligence will be necessary under s. 104(2) in order for a partner in a limited liability partnership to receive liability protection. d. Quasi-Directorship Liability Section 105 sets out certain quasi-directorship liabilities applicable to the partners of limited liability partnerships. It provides that partners in a limited liability partnership are personally liable for a partnership obligation if and to the same extent that they would be liable for the obligation if the obligation was an obligation of a corporation and they were directors of that corporation. The section specifically does not impose on partners the duties imposed on directors of corporations at common law or under s. 142 of the Business Corporations Act. It is unclear what quasi-directorship liability is contemplated. The language is very similar to that adopted in the Model Limited Liability Partnership Act, which is also vague. There, the accompanying commentary refers to statutory liability imposed on directors for certain obligations of a corporation. The only example given is liability for unpaid wages. It is likely that the provision is intended to make specific statutory obligations (such as for wages, taxes and environmental liabilities) applicable to the partners in a limited liability partnership. This may be necessary given the broad definition of partnership obligations in s. 94 which might otherwise shield partners from these specific statutory liabilities. If a corporation is a partner in a limited liability partnership, the directors of the corporation are jointly and severally liable for any liability imposed on the corporation under s. 105(1) or for negligent acts or omissions under s. 104(2), although this will not apply to a director who dissented to, or took the actions a reasonable person would take to prevent, the act or omission that resulted in the liability. e. Recovery of Prohibited Distributions Section 112(1) prohibits a limited liability partnership from making distributions to its partners: (a) in connection with winding up its affairs or after it has ceased to carry on business unless all partnership obligations have been paid or satisfactory provision for their payment has been made, and (b) in circumstances other than in connection with winding up its affairs, if the limited liability partnership would, after the distribution, be unable to pay its partnership obligations as they come due in the ordinary course of business. Repayment of loans, reimbursement of expenses and payments made as reasonable compensation for current services are exempted. Under s. 113, a partner is liable to the partnership in respect of distributions received contrary to s. 112(1). To the extent such distributions are not recovered by the partnership, the partners who authorized the distribution are jointly and severally liable to the partnership for such amount. Proceedings to enforce a liability under this section may be brought by the partnership, by any partner or by any person to whom the partnership was obligated at the time of the distribution. They must be commenced no later than two years after the date of the distribution. f. Loss of Limited Liability Status The Registrar of Companies is authorized to cancel the registration of a limited liability partnership or an extraprovincial limited liability partnership that fails to file an annual report for two consecutive years. Cancellation of registration will not dissolve the partnership but will remove its status as a limited liability partnership.[13] There is no provision which would retroactively restore limited liability status, though cancellation of registration will not affect the liability of the partners in respect of obligations that arose before the cancellation or that arose out of contracts entered into before the cancellation.
B. Tax Considerations 1. General Tax Benefits of Partnership Generally, all types of partnership are attractive forms of business association, providing tax advantages not available in a corporate structure. The most significant distinction that may be drawn between the tax treatment of corporations and partnerships is that a corporation is taxed as a separate legal entity while a partnership is a conduit through which income flows to be taxed in the hands of the partners. Consequently, it may be desirable in certain situations to use a partnership so that income or losses flow through to the individual partners and thus avoid the imposition of tax at the level of the business organization. This may be a considerable advantage in the case of a new business which is expected to incur losses in the first years of operation, in cases where one or more of the participants have losses for tax purposes which can be used to off-set the income earned in the new business, or where financing costs are incurred at the participants level rather than by the business structure itself and it is desirable to match the interest costs with the revenue stream. Despite the obvious tax advantages a partnership may offer, it is important to weigh these against the potential exposure to liability and other risks associated with this form of business association. As with many tax-driven investments, a prudent business decision may often be overshadowed by the desire to avoid tax. 2. Tax Implications of Partial Shield v. Full Shield Liability Protection When considering limited liability partnership status, it should be noted that the partners in partial shield and full shield limited liability partnerships are subject to different tax treatment. Conversion to a full shield limited liability partnership may bring unintended negative tax consequences, and it is therefore important that professional tax advice be obtained in all cases before proceeding with registration in a full shield jurisdiction such as BC. Full shield limited partnerships are taxed much like limited partnerships. The federal government has determined that it is appropriate to treat full shield limited liability partnerships like limited partnerships given that the partners personal assets are shielded from the partnership s commercial obligations. It had previously agreed that partial shield limited liability partnerships would be treated as general partnerships because of the partners exposure to such obligations. The significance of this characterization of limited liability partnerships is that, in contrast to general partnerships and partial shield limited liability partnerships, each partner s adjusted cost base ( ACB ) in their partnership interest must be calculated annually. If, at a partnership s fiscal year end, the ACB of a partnership interest is negative, the partner will be deemed to have a capital gain for income tax purposes equal to the amount by which the ACB is negative. This is obviously not a desirable tax result. There are several reasons that a partnership interest could have negative ACB. Perhaps the most significant involves timing. Typically, ACB is calculated by: Adding: a partner s capital invested in the partnership; and all taxable income earned from the partnership from previous fiscal periods; and any increases in ACB resulting from certain capital gains elections, And then subtracting: allocations of partnership losses to the partner from previous fiscal periods; and all draws or distributions of partnership profit or capital.
In making this calculation, the Income Tax Act (Canada) currently provides that income from the partnership for each year is not added to a partner s ACB until immediately after the partnership s fiscal year-end. This creates a significant timing issue and frequently results in negative cost base. Fortunately, the federal government has agreed to change the timing of the addition of taxable income from a limited liability partnership to the partners ACB in their partnership interest to coincide with the partnership s fiscal year end rather than the current inclusion after the year end. This will resolve the negative ACB issue for many partners in full shield limited liability partnerships. ACB in a partnership interest may be negative in many other situations, such as where: (a) partners have invested very little capital in the partnership or where a partner has withdrawn capital from a partnership; (b) a partner s income has been reduced but his or her draws have not been adjusted during the year and exceed taxable income; (c) partners draw on accounting income and work in progress in excess of their taxable income; (d) a partnership borrows to finance substantially all operations including work-in-progress and disbursements; (e) new partners receive draws in excess of the income allocated to them in accordance with the terms of their partnership admission. The important point is that in a full shield limited liability partnership, ACB will have to be closely monitored each year to avoid unintended tax consequences. 3. Creating a Partial Shield Limited Liability Partnership in BC Rather than move to a partial shield jurisdiction, the partners of a BC limited liability partnership faced with concerns about negative ACB may create a partial shield limited liability partnership by varying the terms of their partnership agreement. The introductory language in s. 104(1), which provides for full shield protection, states: Except as provided in this Part, in another Act or in a partnership agreement, a partner in a limited liability partnership (a) is not personally liable for a partnership obligation This language would seem to allow the partners of a limited liability partnership to accept liability in their partnership agreement for the firm s regular commercial obligations and therefore receive the favourable tax treatment available to partial shield limited liability partnerships. This voluntary acceptance of a partial shield could be utilized during a partnership s start up years when the partners are more likely to face negative ACB. Consideration will have to be given to the question of whether a partnership agreement could be effectively structured so as to allow certain partners access to full shield protection and others to have only partial shield protection. C. Partner Roles The partners in a limited liability partnership have all the same rights and powers and are subject to all the same restrictions and liabilities of partners in a general partnership, subject only to the introduction of limited liability and the quasi-director liabilities discussed above. Under general partnership law, partners owe each other certain duties and obligations. In addition to the common law obligations, the Act establishes the following primary duties owed between partners: (a) the duty to act with the utmost good faith and loyalty towards other partners (s. 22);
(b) 31); (c) 32); (d) the duty to disclose information and render full information with respect to the partnership (s. the duty to account for any benefits obtained by unapproved business in the firm s name (s. the duty not to exploit partnership property for personal benefit (s. 32); and (e) the duty not to engage in competing business without the consent of the partners (s. 33). These duties apply equally to partners in a limited liability partnership as to those in a general partnership. Given the vulnerability of partners in a partnership that arises due to the ability of one partner to exercise unilateral discretion or take unilateral action affecting another s rights and interests, the primary duty which the common law imposes on partners is one of good faith.[14] Lord Lindley summarized this duty in Blisset v. Daniel (1853), 68 E.R. 1022, 10 Hare 493 (U.K. Ch.) as follows: The utmost good faith is due from every member of a partnership towards every other member, and if any dispute arises between partners touching any transaction by which one seeks to benefit himself at the expense of the firm, he will be required to show, not only that he has the law on his side, but that his conduct will bear to be tried by the highest standard of honour. In BC, s. 22(1) of the Act expressly recognizes this duty of good faith. It states that: 22(1) A partner shall act with the utmost fairness and good faith towards the other members in the business of the firm. The case law has characterized the duty owed between co-partners as a fiduciary duty: see Davis v. Ouellette (1981), 27 B.C.L.R. 162 (S.C.) at 173-4 and Pegusch v. Kerr (1994), 53 C.P.R. (3d) 188 at 192, 46 A.C.W.S. (3d) 71 (B.C.S.C.). This means that partners owe a duty of loyalty to their fellow partners and they must, therefore, not allow themselves to be placed in a position where their private interests might come into conflict with their duties to the partnership and to their fellow partners. The fiduciary principle should apply equally to partners in a general partnership or in a limited liability partnership. D. Flexibility Unlike the Business Corporations Act, S.B.C. 2003, c. 70, there are relatively few provisions in the Act governing the relationship between the partners in a limited liability partnership or prescribing their respective rights and obligations. There are, for instance, no statutory counterparts to the provisions in the Business Corporations Act that require shareholder approval for certain actions or which grant statutory rights or remedies upon the occurrence of certain events. Consequently, limited liability partnerships offer a considerable amount of flexibility to the parties to structure their relationship to reflect the negotiated terms of their business relationship. E. Lack of Understanding in the Business Community Consideration should be given to the fact that the limited liability partnership is generally not as well understood in the business community as corporations or even limited partnerships. Consequently, difficulties may be encountered in dealing with suppliers, banks or other institutions. F. Reporting Requirements and Administration Costs Additional administrative costs may be encountered in the use of limited liability partnerships. An annual report must be filed with the Registrar to confirm that the information on file is kept current.[15] In addition, if any of the information in the limited liability partnership s registration changes between the filing of annual reports, a notice of that change must be filed.[16] Limited liability partnerships must also keep at their registered office an up-to-date list of all partners. Records for the limited partnership should be maintained independently from those of the partners.
In addition to annual reports and notice of changes which must be filed with the Registrar of Companies, a professional partnership s governing body may impose additional reporting requirements on limited liability partnerships. In the case of law firms, copies of the firm s annual reports and any amendments to the firm s registration statement must also be filed with the Law Society s Executive Director.[17] Finally, although the limited partnership is not itself subject to tax, income for tax purposes is calculated at the partnership level which entails additional accounting, reporting and administrative expense. V. Forming a Limited Liability Partnership A. Registration Procedures A limited liability partnership is created first by creating a partnership if one does not already exist, and then by filing a registration statement with the British Columbia Registrar of Companies pursuant to s. 96. The existing partnership may be a limited partnership. Before filing a registration statement, consideration should be given to whether any amendments to existing partnership agreements are required. Obvious changes would be to the name of the partnership (to include reference to the limited liability status as discussed below) and authorization to file a registration statement pursuant to s. 96. Language to voluntarily accept only partial shield protection should also be considered for tax purposes. The partnership s proposed name will also need to be reserved in advance with the Registrar of Companies before the registration statement will be accepted. Section 96(4) prescribes information that must be included in the registration statement. Specifically, the registration must: (a) set out the business name of the partnership, and the name that is to be the business name of the partnership after it is registered as a limited liability partnership; (b) set out the mailing address and delivery address of the office that is to be the registered office of the partnership after it is registered as a limited liability partnership; (c) if the partnership is a professional partnership, indicate that fact, and confirm that the partnership is authorized, within the meaning of s. 97, to register as a limited liability partnership; (d) fact; if the partnership is a limited partnership or a registered general partnership, indicate that (e) contain a statement that the person submitting the registration statement for filing has received the approval of all of the partners to file that registration statement, or the partnership agreement authorizes the filing of a registration statement for the partnership under subsection (2); and (f) set out any other information required by the regulations. Section 97 provides that if a partnership is a professional partnership, that partnership must not register as a limited liability partnership unless: (a) members of that profession are expressly authorized by or under the act by which that profession is governed to carry on the practice of the profession through a limited liability partnership, and (b) any prerequisites to that authorization that have been established under that act have been met by the partnership. Note that the name of a limited liability partnership must end in either limited liability partnership or Limited Liability Partnership or their French equivalents.
Once the registration statement is submitted and found to be satisfactory to the Registrar, the Registrar must file the statement, publish a notice of the registration and send an acknowledgement of the receipt and filing to the person who submitted the registration statement and to the partnership s registered office. Unless an agreement among the partners provides otherwise, the registration of a partnership as a limited liability partnership will not cause the dissolution of the partnership and the limited liability partnership continues as the same partnership that existed before the conversion.[18] Subsequent changes in the partnership also will not affect the partnership s status as a limited liability partnership.[19] Promptly after a partnership is registered as a limited liability partnership, the partnership must take reasonable steps to notify all of its existing clients in writing of the registration and the changes in the liability of the partners.[20] A professional governing body may impose additional notice requirements or prescribe the form which this notice is to take. In the case of law firms, the form has been set by Law Society Rule 9-17(3). B. Professional Limited Liability Partnerships Professional partnerships must be authorized by their governing legislation to convert to or form a limited liability partnership. A professional partnership is a partnership through which one or more persons carry on the practice of a profession or occupation that is governed or regulated by an act and by a body created by or under an act.[21] To date, only lawyers, notaries and accountants have been authorized to form limited liability partnerships in BC. Dentists, architects, engineers and other professionals are unable to form limited liability partnerships in BC at this time. Section 97 of the Act also requires that professional partnerships meet any prerequisites to that authorization that have been established by the profession s governing legislation. This will often involve meeting certain minimum insurance requirements. In the case of law firms, it also requires a statement of approval from the Executive Director of the Law Society. To issue a statement of approval of limited liability partnership registration, the Executive Director must first be satisfied that: (a) and (b) (i) (ii) the intended name of the limited liability partnership complies with the Law Society Rules, each partner in the partnership is: a member of the Law Society, a member of a recognized legal profession in another jurisdiction, (iii) a law corporation holding a valid permit under the Law Society Rules or the equivalent in the jurisdiction in which it provides legal services, or (iv) a non-lawyer participating in the partnership in another Canadian jurisdiction as permitted in that jurisdiction.[22] C. Non-Professional Limited Liability Partnerships In most jurisdictions, the right to participate in a limited liability partnership is limited to professionals. BC allows anyone, other than professionals who are not authorized by their governing legislation, to form a limited liability partnership. Given the benefits afforded to the partners of a limited liability partnership, there is good reason for all general partnerships and those who would otherwise be contemplating the use of a general partnership to at least consider converting to a limited liability partnership. One can see few reasons, other than potentially the tax treatment of a full shield limited liability partnership discussed above, not to proceed.
In deciding whether to register a partnership as a non-professional limited liability partnership, one should bear in mind that if the partnership operates in a jurisdiction which does not recognize nonprofessional limited liability partnerships, the partnership would likely be treated in that jurisdiction as a general partnership regardless of its status in BC. The partners would therefore be jointly and severally liable for all of the partnership obligations arising in that foreign jurisdiction. In Canada, no province other than BC will currently recognize non-professional limited liability partnerships.[23] Legislation enacted in Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, and Nova Scotia allows only for the registration of eligible professionals as limited liability partnerships. Nonetheless, the partnership s status outside of BC will be no worse than had it not registered as a limited liability partnership. D. Foreign Limited Liability Partnerships Whether or not a partnership governed by a jurisdiction other than BC has the status of a limited liability partnership in that jurisdiction, the liability attributable to the foreign partnership and its partners while carrying on business in BC will be the same as the liability attributable to a general partnership and its partners unless that foreign partnership is registered in BC as an extraprovincial limited liability partnership. This rule, encoded in s. 114, is simply a declaration of the common law. The effect is that all partners in a firm which is not registered as an extraprovincial limited liability partnership in BC (not simply those partners in BC) will be treated as general partners in respect of claims arising from work performed in BC. A limited liability partnership governed by the laws of another jurisdiction may register in BC. The partners will then receive the level of protection provided by the law of the extraprovincial partnership s governing jurisdiction, provided that such protection does not exceed that provided to a BC limited liability partnership. All partners of a limited liability partnership governed by a partial shield jurisdiction that registers as an extraprovincial limited liability partnership in BC will therefore receive only partial shield protection against claims made in respect of work performed in BC rather than the full shield protection offered to limited liability partnerships formed in BC. Using an Ontario limited liability partnership as an example, where a claim is made in BC against the partners of an Ontario limited liability partnership registered extraprovincially in BC, all partners of the Ontario firm would receive the modified partial shield protection offered by the Ontario legislation (i.e., protection only for negligent acts or omissions). This protection would then be qualified by the application of s. 104(2) of the Act (for which there is no equivalent provision in Ontario) which precludes limited liability where the partner in question knew of the subject act or omission and did not take the actions that a reasonable person would take to prevent it. VI. Drafting Limited Liability Partnership Agreements The relationship between partners and their respective rights and obligations will normally be set out in a partnership agreement. A partnership agreement governing the relationship between the partners of a limited liability partnership will not differ significantly from an agreement governing the affairs of a general partnership. In both cases, it is generally advisable to make such an agreement fairly comprehensive. It should address matters which are not covered by the Act and should also include provisions dealing with matters covered by the Act which can be varied or abrogated by agreement where the statutory provisions are not satisfactory in the particular circumstances. Since the Act does not prescribe requirements with respect to meetings, partnership procedures or other matters, it may be necessary to address these in the partnership agreement. It may be appropriate to include many of the provisions typically found in the Articles of a company for the internal management of its affairs plus analogous provisions to those found in a shareholders agreement. Even where the Act contains provisions governing the relationship between partners, these can often be varied or amended by the partnership agreement. For example, s. 27, which sets out the rights of partners with respect to capital and profits, indemnification, remuneration, admission of new partners and other matters, is expressly subject to any agreement between the partners. Usually the agreement will address the following issues:
(1) the relationship between the partners; (2) responsibility for management and decision-making; (3) contributions and return of contributions; (4) indemnification and remuneration; (5) rights to capital; (6) allocation of profits and losses; (7) requirements for meetings and other internal procedures; (8) admission of new partners; (9) transfer and issue of partnership interests; (10) the right to continue the partnership on the bankruptcy, retirement, death, mental incompetence, or dissolution of a general partner; (11) the right of a partner to carry on a competitive or other business; and (12) dissolution. In the case of a limited liability partnership, the partnership agreement should authorize the filing of the limited liability partnership registration statement pursuant to s. 96. If this authorization is not included in the agreement, a written resolution or authorization of all partners will be needed to file the statement. Consideration should be given as to whether the partners should have partial shield or full shield protection. As discussed above, there may be tax reasons for providing for only a partial shield. If partial shield protection is appropriate, specific language will be needed to modify the liability protection offered by s. 104(1). If full shield protection is desired, the partnership agreement should expressly provide that the provisions of Part 6 of the Act (or at least s. 104(1)) will prevail in the event of any conflict between the Act and the partnership agreement. This may prevent any inadvertent contracting out of the full shield protection provided under Part 6 which is permissible under the introductory language to s. 104(1). VII. Conclusion Limited liability partnerships, while still new, provide their members with significant advantages over general partnerships. They should be the vehicle of choice for many professionals authorized by their governing legislation to use them, and should also be carefully considered by nonprofessionals. -------------------------------------------------------------------------------- [1] Partnership Act, R.S.B.C. 1996, c. 348, ss. 11 and 12. [2] Section 95 provides that the Act applies to limited liability partnerships with the exception of Part 3 (dealing with limited partnerships), ss. 11 and 14 (dealing with liability in a general partnership), ss. 80.1 to 88 (dealing with the registration of general partnerships), and ss. 90 and 90.3(a)(ii) (dealing with indices and information maintained by the Registrar). [3] Section 91. [4] Limited Liability Partnerships, Alberta Law Reform Institute, Final Report No. 77, April 1999, at 7.
[5] Limited Liability Partnerships, Alberta Law Reform Institute, Final Report No. 77, April 1999, at 47. [6] S.O. 1998, c. 2, amending the Partnership Act, R.S.O. 1990, c. P.5. [7] S.B.C. 2004, c. 38, s. 7. [8] See Partnership Act, R.S.O. 1990, c. P.5, as amended by S.O. 1998, c. 2 and Partnership Act, R.S.A. 1980, c. P-2, as amended by S.A. 1999, c. 27. [9] Partnership Act, R.S.O. 1990, c. P.5, as amended by S.O. 1998, c. 2, s. 10(2). [10] Limited Liability Partnerships, Alberta Law Reform Institute, Final Report No. 77, April 1999, at 102. [11] Section 94. [12] Section 106. [13] Section 129(4). [14] Lindley & Banks on Partnerships, 17th ed. (London: Sweet & Maxwell, 1995) at 483. [15] Section 110. [16] Section 111. [17] Law Society Rule 9-18. [18] Section 99. [19] Section 102. [20] Section 107. [21] Section 94. [22] Society Rule 9-15. [23] Though draft legislation currently under review in Prince Edward Island is modelled after BC s legislation and would allow for non-professional limited liability partnerships.