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LLP - Another Tool for the Toolbox 

By Stu Wells                                       April 5, 2005

There is a new tool available to someone looking to put a small group of participants together for a project or series of projects. Recent amendments to the BC Partnership Act have introduced the Limited Liability Partnership or "LLP" for BC business. Unlike other provinces, which introduced LLP legislation primarily to accommodate professional firms, BC has made LLP available as a new vehicle for structuring businesses in general. Here’s a very brief primer.

Where it Fits

Sometimes participants want both a say in the development process and limited liability. Without LLP, these objectives were commonly addressed through use of the following:

  1. a limited partnership – participants invested as limited partners but took shares in the General Partner and were represented on the board;

  2. a corporate development vehicle – the participants invested by providing shareholder loans, took shares in the entity and were represented on the board;

  3. a joint venture – the participants invested by using single purpose entities as the venturers and took contractual rights in the decision making process under a form of co-ownership or joint venture agreement; or

  4. mezzanine debt – the participants stepped back from the development process altogether, made an investment by way of debt with a participation feature and used some form of inter-lender agreement to gain a voting right to be exercised through the loan agreement.

Each of these commonly used alternatives provides some form of limited liability and an opportunity to participate in project decision making. However, each of these approaches has well understood limitations and hoop jumping is a necessary consequence in each case. An LLP addresses the voting and limited liability concerns nicely.

LLPs in brief

An LLP provides the benefits of general partnership, including the usual tax advantages and full voting rights for partners, but the partners are not liable for partnership obligations. An LLP is something like a limited partnership where the functions of the general partner have been transferred to the limited partners. Unlike a limited partnership, and as an added benefit (depending on how you look at it), an LLP can provide a mechanism for making cash calls on the partners.

Tax Considerations

The LLP concept has all the usual tax advantages of a partnership. It effectively combines the flow-through tax treatment of a partnership with the limited liability of a shareholder. The opportunity exists to bring in new partners before year end and allow them to benefit from shelter or losses generated earlier in the fiscal year. This can provide a distinct advantage over a joint venture, especially when some participants might be a little late getting to the table or if it becomes necessary to add participants after commencement. Of course, the "at risk" rules will apply.

Extent of liability protection

With a few exceptions, the exposure of an LLP partner to partnership creditors is limited to the capital invested. For experienced participants, the trade off for taking on some limited liability in return for a real say in decision making will be attractive.

Exceptions to Limited Liability

An LLP partner receives shareholder-like protection but, not surprisingly, is subject to director-like liability. While a limited partner is, by definition, passive in relation to the business of the limited partnership (and hence ought not to be liable to creditors beyond invested capital), an LLP partner is presumed to take an active role and is accordingly treated more like a director of a corporation. Like a director, an LLP partner remains liable for some statutorily imposed obligations, including employee payroll source deductions, unpaid employee wages, GST and PST remittances. For many experienced participants, these areas of exposure are nothing new. Many development vehicles have no direct employees anyway, so this level of exposure is also not usually of additional concern. An LLP partner is also liable for his or her own negligent or wrongful acts and for failing to take steps to prevent known wrongful acts of another partner or an employee of the LLP from happening. Again, experienced participants will find little startling with this level of exposure, and insurance is available to mitigate much of this type of risk.

General

While professional firms throughout BC (like Clark Wilson LLP) have raced to embrace LLP status, I don’t expect a stampede towards LLP in the development industry. However, particular circumstances will arise where it will make very good sense to use one. Your professional advisors can tell you when is a good time.

- Stu Wells

 

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