LIMITED LIABILITY PARTNERSHIPS A Review of Legal Issues By John E. Rogers, of Burns, Fitzpatrick, Rogers & Schwartz 0

A.Definition of Partnership Section 2: Partnership is the relation which subsists between persons carrying on business in common with a view of profit (exists without the requirement to register a certificate unless the business is trading, mining or manufacturing). Section 7: The acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he or she is a member bind the firm and his or her partners, unless (a) the partner so acting has in fact no authority to act for the firm in the particular matter, and (b) the person with whom he or she is dealing either knows that the partner has no authority, or does not know or believe him or her to be a partner.

B. Types of Partnerships 1. General Partnership: see definition above. Most common form of partnership for professionals

2. Joint Venture: Another form of General Partnership. BUT, most Joint Venture Agreements state that the participants are not partners and exclude liabilities of partnership.

3. Limited Partnership: Requires one or more General Partners and one or more Limited Partners (Section 50); Created by filing a specified certificate under the Partnership Act. Requires a written partnership agreement. The Limited Partners have no personal liability unless they participate in the management. The General Partner signs for the Limited Partnership if granted authority to do so under the Partnership Agreement. (Section 78 (3)). Used most frequently for time limited single purpose ventures and tax shelters where “flow through” of gains and loses for tax purposes is important.

4. Limited Liability Partnership (“LLP”): Created by Registration (Section 96). May be provincial or extra-provincial. Most other aspects of the Partnership Act apply to LLP (but this is misleading as it is really like a company). Similar to LLCs in U.S. jurisdictions..flow though entities for tax purposes. Has many of the characteristics of a limited liability company.

C. Liability of Partners 1. General Partners: Section 11: “A partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he or she is a partner, and after his or her death his or her estate is also severally liable in a due course of administration for those debts and obligations, so far as they remain unsatisfied, but subject to the prior payment of his or her separate debts.” BUT WATCH FOR: Section 20: “A continuing guaranty or cautionary obligation given to a firm or to a third person in respect of the transactions of a firm is, in the absence of agreement to the contrary, revoked as to future transactions by any change in the constitution of the firm to which, or of the firm in respect of the transactions of which, the guaranty or obligation was given.” AND: Section 5: If you loan money to a firm with the rate of return contingent on the profits of the firm and the firm becomes insolvent and cannot pay 100 cents on the dollar, you are postponed to all other creditors until they are paid.

Joint Liability is when “two or more persons are both responsible for a debt, claim or judgment. It can be important to the person making the claim, as well as to a person who is sued, who can demand that anyone with joint liability for the alleged debt or claim for damages be joined in (brought into) the lawsuit with them”. Partners in a regular/general partnership are “jointly” liable for all debts.

2. Limited Partners: Section 57:.. a limited partner is not liable for the obligations of the limited partnership except in respect of the amount of property he or she contributes or agrees to contribute to the capital of the limited partnership. The General Partner has the same full liability as a partner in a General Partnership.

3. Limited Liability Partners: Section 95(2): Regular liability of partners does not apply to Limited Liability Partners. Limited Liability Partner: –is not liable for partnership debts; –is liable for his/her own negligence; –is liable for negligence of employees and other partners if he/she knew of the problem and did not take reasonable steps to prevent it; and otherwise –Liability is limited to only the assets in the firm (see Section 104).

This is the “full shield” version of limited liability for partners. Section 104 is copied from the Model Act published by the Uniform Law Conference of Canada. The commentary by the Conference states: “It will be noted that the introductory words of subsection (1) are "Except as expressly provided in this Part, another Act. It does not say, "except as expressly provided in this Act." Thus, provisions in other Parts of the Partnership Act that expressly impose personal liability on partners do not override the liability protections provided in subsection (1).”

When you add the provisions of Section 105, Limited Liability Partners have fewer liabilities than directors of corporations although they do have liability for employee wages, tax deductions at source, etc.

Extra-Provincial LLPs: All partners of an extra-provincial LLP that is carrying on business in B.C. but not registered under the Act are jointly personally liable as if they were General Partners (Section 114). This is good for the Bank but bad for the LLP.

Note: A partner in an LLP can take part in the management of a LLP without losing his/her limited liability whereas a limited partner in a Limited Partnership can not!

D. Rules Relating to Professional Partnerships

There are few rules established by professional associations.

E. Legal Issues in Partnerships The Law Society requires the following notice to clients of firms converting to a LLP: “The partners in a limited liability partnership are not personally liable for the negligent acts or omissions of another partner or an employee unless the partner knew of the negligent act or omission and did not take reasonable steps to prevent it. Each partner is personally liable for his or her own actions, and the partnership continues to be liable for the negligence of its partners, associates and employees. Accordingly, there is no reduction or limitation on the liability of the partnership.”

What it does not say is that the partners are no longer liable for the debts or obligations of the partnership. More candidly, the Benchers have stated: “ A limited liability partnership structure shields an individual partner from personal liability for the debts of the partnership or for negligence and wrongdoing of other partners, except to the extent of the partner’s share in the partnership’s assets. Individual partners continue to incur personal liability for their own negligence or wrongful acts and those of the persons they directly supervise or control.”

F. Comments LLP partners have “full shield” protection from partnership debts like shareholders of a corporation. In dealing with an LLP: –treat it like a corporation. –BUT you must read the Partnership Agreement and confirm its status a registered LLP. –All partners should sign guarantees of the LLP loans. –Obtain certificate of parties signing for the LLP that they have power to bind the partnership. This can be in the loan document.

In some respects, a partner of a LLP is more protected than a shareholder/director of a Limited Liability Company. If we add in a Personal Law Corporation as the partner of the LLP, the limitation on personal liability becomes even more complete. Professional societies do not require their members who are LLP partners to agree to liability to third parties other than for professional negligence. Question: Would anyone other than the “firm” be liable for an opinion signed “McCarthys LLP” or an undertaking?