Limited Partnerships: Structuring an Investment Fund

Limited Partnerships: Structuring an Investment Fund


A limited partnership is the preferred structure for the formation of real estate investment funds, private equity funds and venture capital funds. This article will show why this is the case by exploring some key attributes of limited partnerships.[1]

  1.  Limited Liability

At a high level, a limited partnership is a partnership which carries on a business and in which limited partners have limited liability. The general partner manages the business and is liable for the obligations of the limited partnership.[2]

Limited partners are passive investors who contribute capital to the limited partnership without participating in the management of the business. Their liability is limited to the amount of capital they have contributed, or have agreed to contribute, to the partnership. However, in order to maintain their limited liability status, limited partners must not take part in the control of the business of the partnership.

  1.  Flow-Through Vehicle

A limited partnership is treated as a flow-through vehicle for income tax purposes since the partnership, itself, is not subject to income tax. Each partner is allocated its share of income or loss from the partnership and is responsible for reporting such income or loss on its own tax return for its taxation year.[3]

Essentially, income of the limited partnership “flows through” to the partners since there is no taxation at the partnership level.

  1.  Flexible, Non-Proportionate Profit Allocation

The general partner may receive a share of profits of the limited partnership which is greater than its proportionate share of capital contributions made to the partnership, the terms of which may be set out in a limited partnership agreement. Also known as “carried interest,” the general partner is allowed to receive a certain percentage of the profits of the partnership as compensation for the work that it performs. The general partner is financially rewarded for such activities as sourcing deals, making astute investment decisions, improving the underlying real estate assets or portfolio companies, and selling such assets or companies for investment gains – essentially, creating value in the business.

For example, a general partner may contribute only 1% of the total capital of a limited partnership, but may be entitled to 50%, 30% or 20% of the profit distributions after limited partners have received all of their capital contributions in full.

In addition to the carried interest, the general partner may also receive management fees, which would be calculated as a percentage of capital committed or contributed by limited partners to the limited partnership.

  1.  Transferability of Limited Partnership Interests

The Limited Partnerships Act (Ontario) (the “Act”) permits limited partners to assign their interests to another party. A limited partnership agreement typically prescribes the manner in which any assignment, transfer or sale of limited partnership interests will take place.

  1.  Information Rights

Limited partners have robust information rights under the Act. They have access to the books and records of the limited partnership and can demand information concerning all matters affecting the limited partnership. Additional information rights can be obtained by the limited partners under the terms of a limited partnership agreement.

  1.  Fixed Term

A limited partnership agreement can specify the term (or duration) of the limited partnership. A fixed term will provide investors with an investment time horizon for their investment in the partnership. It is typical for a private equity fund to have a 10-year term, which can be abridged or extended, subject to the terms of a limited partnership agreement. A single-project real estate investment fund can be set up with a 5-year term or any other term agreed to by the partners.



This article is for informational purposes only and does not constitute legal advice.

For more information about limited partnerships and investment funds, contact David Kim of Crescendo Law at [email protected]. To learn more about Crescendo Law, visit our website at

[1]  This article is limited in scope to limited partnerships formed in Ontario pursuant to the Limited Partnerships Act (Ontario). The term “investment fund” in this article does not refer to a “mutual fund” or a “non-redeemable investment fund” as such terms are defined under Canadian securities laws.

[2]  A corporation is typically formed to act as the general partner in order to provide limited liability protection for the shareholders of the general partner.

[3]  Income Tax Act (Canada); Elizabeth J. Johnson & Genevieve C. Lille, “The Taxation of Partnerships in Canada” (2009) Bulletin for International Taxation (August/September 2009).