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Spring 1999 

Understanding Your Mortgage
The   Limited Liability Partnership
Automobile Expense Worksheet

The Limited Liability Partnership

TRADITIONALLY THERE HAVE BEEN three different ways that a person or a group of persons could conduct business in Canada. These were in the form of a sole proprietor ship whereby a business is owned (and usual ly managed) by a single individual who has provided the financial resources, a partner-ship that is similar to a proprietorship but involves more than one person and a corporation that is deemed to be a distinct legal entity that exists until it is dissolved by law.

From a legal perspective, the business operations of a proprietorship cannot be distinguished from the activities of its owner. For example, if the business is behind in the payment of its bills, the creditors have the right to take legal action against the owner’s non- business assets in order to secure payment. The owner therefore has unlimited liability for the debts incurred in the name of the business. The owner and the business are considered to be one legal entity.

A partnership extends this same concept to each of its members. An individual partner is jointly and severally responsible for the obligations of any business conducted in its name. Consequently, if the creditors cannot be satisfied through the affairs of the partner ship as a whole, they may sue individual members, singularly or as a group, to seek restitution. The partners and their business are once again treated as a single legal entity. The corporation has a legal existence of its own, separate from its owners. Its debts do not be long to its individual owners and their assets are not at risk through any transactions undertaken by the company. This limited ability feature allows a corporation to attract new investors whose interests are easily transferable through the sale of shares. In the past few years a new form of business structure has emerged. It is called The Limited Liability Partnership and it is a hybrid of some of the characteristics of a partnership and some of a limited company. Passed into law through amendment of the Partnerships Act, it is presently available in Ontario and many American states. Consequently, it is inevitable that it will become commonplace wherever business will be conducted in the future.

A Limited Liability Partnership (LPP) allows an individual partner in a partnership to be exempt from the liabilities of the partnership as a whole or from the liabilities of any other individual partner that may arise from negligent acts or malpractices for which that other partner may have been responsible. The partnership as an entity continues to exist, however, and the totality of its assets remain at risk.

The establishment of an LPP does not protect partners from liability for their own negligence or for the negligence of anyone under their direct supervision nor will it absolve them of any contractual debts or liabilities incurred by the partnership as a whole. Similarly, it will not shield individual partners from any liabilities resulting from the actions of other members of the partnership outside the course of partnership business such as fraud or negligence.

Traditionally, most partnerships have not required partners committing negligent acts to bear the cost alone - even to the extent of insurance deductibles or claims that are in excess of insurance coverage. In an LPP, however, negligent partners will be abandoned to the extent that the assets of the partnership as a whole are not available to satisfy the liability or debt.

The potential for certain partners of a partnership to be treated differently in the face of a negligence claim and a business structure that encourages partners to abandon other partners is a radical change to our business culture. It remains to be seen whether partnerships as we have come to see them will be able to continue as a viable business arrangement in the face of these recent developments.

Spring 1999: Prenuptial Agreements | Understanding Your Mortgage | The Limited Liability Partnership | Automobile Expense Worksheet

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