Anonymised, illustrative composite. The co-investor put in $2,100,000 as a limited partner and then started running the business. Ontario draws the line at control, and the counterparties’ own contracts showed which side of it he was on.
At a glance
A small Ontario sponsor bought a regional logistics operator through an Ontario limited partnership. The sponsor’s corporation was the general partner; a family office subscribed $2,100,000 for units as a limited partner, against a total equity cheque of $5,300,000 and a $3,400,000 senior acquisition facility.
The limited partnership agreement was ordinary: information rights, consent rights over new indebtedness above $500,000 and over a sale of the business, an annual meeting. No right to manage, and no wish for one when it signed.
In month seven the business missed plan twice running and the sponsor’s principal was distracted by a second deal. The family office principal — a former operator, and the largest single cheque in the structure — stepped in. Over five months he chaired the Monday operations meeting, negotiated and signed two supplier agreements in the partnership’s name, terminated the dispatch manager and hired a replacement. Two suppliers began sending invoices to his email address.
None of this was hidden and none of it was done in bad faith. It was a co-investor trying to save his own money. It was also, on Ontario’s test, taking part in the control of the business.
Section 13(1) of the Limited Partnerships Act is one sentence: “A limited partner is not liable as a general partner unless, in addition to exercising rights and powers as a limited partner, the limited partner takes part in the control of the business.”
Section 13(2) then removes one obvious argument from the other side: “a limited partner shall not be presumed to be taking part in the control of the business by reason only that the limited partner exercises rights and powers in addition to the rights and powers conferred upon the limited partner by this Act”. That is a non-presumption, not a defence. It means a consent right or a veto in the partnership agreement does not by itself put a limited partner over the line. It says nothing at all about a limited partner who signs supplier contracts and fires staff.
What Ontario does give is a short list of expressly permitted activity in s.12(2). A limited partner may “examine into the state and progress of the limited partnership business and may advise as to its management”; may “act as a contractor for or an agent or employee of the limited partnership or of a general partner”; and may act as a surety. That list is narrower than it looks. Advising as to management is not directing it, and the agent-or-employee limb protects a role held under the general partner, not one that displaces it.
The reason this matters is the size of the difference. Section 9 caps a compliant limited partner’s exposure: “a limited partner is not liable for the obligations of the limited partnership except in respect of the value of money and other property the limited partner contributes or agrees to contribute to the limited partnership, as stated in the record of limited partners”. That is $2,100,000 — money already spent, and the worst case is losing it.
Liability as a general partner is not a bigger version of the same number. It is a different kind of number: the partnership’s obligations, without a cap. On this balance sheet that meant the $3,400,000 acquisition facility, $760,000 of trade payables, a tractor-and-trailer lease with $410,000 of remaining payments, and whatever else the business owed. Against a $2,100,000 investment, the downside had quietly quadrupled and stopped having a ceiling.
Nobody sued, which is the usual ending and the reason this risk is chronically under-priced. The conduct was restructured before anyone had cause to. The family office principal resigned the de facto operating role and was retained as an employee of the general partner under a written agreement, with a reporting line to the general partner’s board and no authority to bind the partnership except under written delegated authority. That is the s.12(2) limb doing what it is there for: it lets a limited partner work in the business, provided the work is held under the general partner rather than over it.
The two supplier agreements were re-executed by the general partner, and the Monday meeting kept its attendees and changed its chair. Amending the partnership agreement to record the delegated-authority framework was housekeeping rather than a fix — s.13(2) already meant the agreement’s own terms were not the problem.
The cost is not a settlement. It is what the family office could no longer say. A limited partner who has taken part in the control of the business has lost the one structural feature it bought the units for, in respect of obligations it did not authorise and cannot see. On a refinancing, a lender’s counsel who reads the supplier agreements finds a limited partner’s signature on partnership contracts and asks a question with no good answer.
The tell is a signature block. If a limited partner’s name appears as signatory on a contract that binds the partnership, the question of whether they took part in the control of the business has already been answered in the counterparty’s own file, and answered by the person facing the liability. The second tell is an email address: when suppliers start sending invoices to the investor rather than to the operator, the market has decided who is running the business.
The province is not a detail here. In British Columbia the Partnership Act s.64 is barer still: “A limited partner is not liable as a general partner unless the limited partner takes part in the management of the business.” No permitted-activity list, no non-presumption subsection, and the operative word is management rather than control. In Quebec the test inverts. Article 2244 of the Civil Code of Québec provides that “A special partner may only give advisory opinions regarding the management of the partnership.” Its second paragraph then makes acting as mandatary or agent for the partnership the very thing that triggers liability, and grades the consequence: the special partner “is liable in the same manner as a general partner for the obligations of the partnership resulting from such acts and, according to the importance or number of such acts, he may be liable in the same manner as a general partner for all the obligations of the partnership”. So the agency role Ontario expressly permits in s.12(2)(b) is the role Quebec penalises — and Quebec’s liability is graduated where Ontario’s is binary.
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