Pooling several investors’ money into one Canadian vehicle usually comes down to two real choices: a limited partnership or a corporation. Here is what actually differs, not just the labels.
Key takeaways
A limited partnership caps a limited partner’s liability at the amount they invested, which is precisely the feature that makes it attractive for passive, pooled capital — investors who want exposure to a deal or a portfolio without exposure to the vehicle’s debts beyond their own contribution. The general partner does not get that protection: general partners retain unlimited personal liability for the partnership’s obligations, which is why the general partner in an investment limited partnership is almost always itself a corporation rather than an individual, layering a second entity’s limited liability underneath the general partner role. A corporation sidesteps this split entirely — every shareholder, active or passive, has liability capped at what they paid for their shares, with no equivalent to the general partner’s exposure anywhere in the structure.
ITA s. 96(1) computes each partner’s share of the partnership’s income, loss, and other tax attributes as if that partner had earned them directly, preserving the source and character of the amount as it passes through — a capital gain realized inside the partnership is a capital gain in each partner’s hands, not partnership income converted into something else on the way out. A corporation does not work this way: it is itself a taxpayer, computes and pays its own tax on income earned inside it, and only what it chooses to distribute afterward reaches shareholders, as a dividend rather than as the underlying gain or income retaining its original character. For investors who want gains and losses to land directly on their own returns without an intervening corporate-level computation, that is the structural reason a limited partnership is the more common vehicle for pooled private capital.
A corporation is run by its directors, who owe statutory duties under CBCA s. 122 to act honestly, in good faith, and with the care a reasonably prudent person would exercise — and investors who want to constrain how those directors exercise their powers typically do it through a s. 146 unanimous shareholder agreement, which can validly restrict the directors’ powers and shift the corresponding duties onto whoever the agreement gives those powers to instead. A limited partnership has no directors and no equivalent default statutory duty structure at that level — the general partner manages the partnership’s business exclusively, and a limited partner who starts taking an active role in management is stepping outside the passive role the structure was built to protect. Investor control, in a limited partnership, is negotiated entirely inside the LPA itself, not layered on top of a statutory governance framework the way a USA sits on top of the CBCA.
Choosing the vehicle type answers liability and tax questions; it does not answer where to incorporate a corporation, which is covered separately in structuring a first Canadian acquisition vehicle for the corporate route. A limited partnership instead follows its own filing requirement — a declaration filed under the applicable provincial Limited Partnerships Act, a materially different process from incorporation.
A limited partnership suits raising passive capital from investors who do not want unlimited personal liability, particularly for real estate projects, private funds, or joint ventures where the investor base is not expected to take an active role. A corporation suits a smaller group of investors who expect more direct governance rights — board representation, veto rights over specific decisions through a USA — over a vehicle they may also be more actively involved in running, and it is the simpler choice where the vehicle will itself roll up multiple portfolio companies over time using the amalgamation and rollover mechanics available to a corporate holding structure, which have no direct equivalent inside a limited partnership.
Neither choice changes what is required to raise the pooled capital in the first place: National Instrument 45-106’s accredited-investor and private-issuer exemptions apply identically whether the vehicle receiving the investment is a limited partnership interest or shares of a corporation. The vehicle choice governs what investors hold once they are in and how gains and losses are taxed and distributed — it does not change the securities-law analysis of how they were allowed to invest in the first place.
Six investors want exposure to a single Canadian acquisition without any of them taking on liability beyond their own cheque, and without an intervening layer of corporate tax before gains reach them. A limited partnership, with a corporate general partner managing it, delivers both: liability capped at each limited partner’s contribution, and gains flowing through under s. 96(1) with their character preserved. The same six investors, if instead they wanted board seats, a USA constraining management’s powers, and a vehicle built to acquire and later amalgamate several operating companies under one holding structure, would be better served by a corporation — accepting a layer of corporate-level tax on the way, in exchange for the governance tools a limited partnership does not offer. Neither answer is generically correct; it follows from whether the investor group wants to be passive or wants a direct hand in governance.
The protection is built around the limited partner staying passive; taking an active role in managing the partnership's business is the kind of conduct that structurally undermines the reason the liability cap exists in the first place, so passive investors should confirm with counsel where that line sits before getting involved operationally.
A corporation is itself a taxpayer on its own income, and dividends are a separate, later event from that corporate-level tax — the practical effect depends heavily on the specific facts and is a question for tax advice on the actual structure, not a general rule to assume either way.
No — a limited partnership is created by filing a declaration under the applicable provincial Limited Partnerships Act, naming the general partners, the business and the term, which is a different filing regime from incorporating a corporation.
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