In recent years, there has been a growing interest among multinational investors and entrepreneurs in creating Canadian limited partnerships to establish an entity for banking or credit card processing that benefits from the “clean” reputation of Canada. This approach is particularly beneficial for software development and IT services supporting customers in Canada, the US, or the EU as well as any online-based business providing goods or services in the global marketplace. However, since this decision can have unforeseen tax or legal consequences, it’s important to consult an experienced business planning and transactions attorney before you proceed.
Understanding Canadian Limited Partnerships
There are three ways to organize a business in Canada: general partnership, sole proprietorship, and corporation. A limited partnership is a type of general partnership that has at least one general partner who is responsible for running the business and a limited or “silent” partner who is contributing capital but not handling day-to-day operational tasks.
If you’re considering creating a Canadian limited partnership for your business, keep in mind the following key points:
- Canadian residency is not necessary for someone to be a general partner or a limited partner.
- The limited partnership can have a single individual acting as the sole general and limited partner or include the contributions of multiple partners.
- While a general partner is liable for the full assets and liabilities of the partnership, a limited partner’s liability is protected up to the amount of capital they contributed to the limited partnership. However, protection from liability can be lost when a limited partner begins directly managing the limited partnership.
- Limited partnerships have no audit requirements.
- There is no minimum contribution requirement.
- Limited partnerships have no corporate income tax and are not required to file corporate tax returns in Canada.
- There is no withholding tax on profits received by partners outside of Canada, but partners may be subject to taxation or reporting obligations in their own jurisdiction.
Creating a Comprehensive Business Plan
While Canadian limited partnerships have several advantages, a successful international business strategy is multi-faceted. Relying on one legal structure to provide full protection can often backfire, so it’s vital you consult an experienced business attorney to determine which options best meet your unique needs. Contact us for details.