Limited Liability Partnership

What is a Limited Liability Partnership?

A Limited Liability Partnership (LLP) is an agreement between two or more individuals to undertake a business with the intent of sharing the profits, but with limited exposure to liability for all the partners.

In Canada, Limited Liability Partnership are only allowed in certain provinces and to certain groups of regulated professionals. Lawyers, paralegals, charter professional accountants, and doctors often use a LLP as a corporate vehicle because it allows them to join a partnership and enjoy the benefits of such an arrangement, while simultaneously limiting their exposure to liability. Individual partners in a LLP cannot be held liable for the debts, liabilities, negligence, or obligations of the LLP or employees of the LLP.

Advantages and Disadvantages of a Limited Liability Partnership

Deciding whether to form a Limited Liability Partnership as a business entity will depend on your specific goals. It’s important to consider both the advantages and disadvantages of this partnership structure, which include:

ADVANTAGES

The personal liability of an individual partner in a Limited Liability Partnership (LLP) is limited, such that they cannot be held responsible for the debts, obligations, or liabilities of the LLP or it’s employees
Setting up an LLP is generally a more cost-effective option compared to establishing a corporation.
Allows for flexible agreement in the management of the business among partners

DISADVANTAGES

An individual partner in a Limited Liability Partnership can be held liable for their own negligence or wrongful acts or omissions, or those employees under their direct supervision. May also be liable for criminal or fraudulent activities in certain cases.
There are typically restrictions on business activities
Earnings from the Limited Liability Partnership will be taxed at the personal level of the partner, which may prove to be disadvantageous if this will further increase the tax bracket of the partner

Forming a Limited Liability Partnership

In Ontario, the Partnerships Act governs the Limited Liability Partnership Agreements. The first step in registering an LLP is to request a pre-approval for the firm’s name. Your LLP’s name must include the terms “limited liability partnership” or “société à responsabilité limitée” or the abbreviations “LLP”, “L.L.P.”, or “s.r.l.” as the final words or letters of the name. Once you have received the approval for the name, you must register the LLP with the Ministry of Government and Consumer Services. Your registration application will require the Business Identification Number (BIN), which will be stamped on the Ministry-certified form.

How are Limited Liability Partnership Taxed in Canada?

Limited Liability Partnerships are usually classified as “pass-through tax entities”. As a pass-through entity, no taxes are paid at the partnership level and instead each partner in the Limited Liability Partnership is responsible to pay taxes based on their respective profits (or losses) from the Limited Liability Partnership.

Contact a Business Lawyer for your Limited Liability Partnership