What is a limited partnership, and why do funds use them?

Two kinds of partner

A limited partnership has one or more general partners, which manage the business and carry unlimited liability for its obligations, and any number of limited partners, who contribute capital and whose liability is limited to what they contributed. The limited partners do not manage the business — and in most provinces, if they start to, they can lose the limited liability that is the whole point.

Why property funds use them

Two reasons, and both are practical. Liability is contained: if a development goes wrong, an investor's exposure is what they put in, not their house. And income and losses flow through to the partners rather than being taxed inside the partnership first, so the same dollar is not taxed twice on its way to you. A corporation would tax it once at the corporate level and again on distribution.

Why the general partner is usually a corporation

Because somebody has to carry unlimited liability, and no sensible person carries it personally. So the general partner is typically a corporation formed for the purpose, owned by the manager. That is not a trick; it is the standard arrangement, and it is disclosed.

Stacked partnerships, and why they are not automatically suspicious

Funds often have more than one layer: a partnership that holds a single property, and above it a partnership that holds several of those. It looks like complexity for its own sake and usually is not. Keeping each property in its own vehicle means a problem at one site — a construction dispute, an environmental issue, a lender — does not reach across into the others. The question to ask is not "why are there layers" but "what does each layer do, and who controls it?"

Where a trust fits on top

A trust sitting above a partnership is doing something specific: units of a trust that qualifies as a mutual fund trust can be held inside registered plans — an RRSP, RRIF, TFSA, RESP and the rest — where a bare partnership interest generally cannot. So the retail investor holds units of the trust, the trust holds the partnership interests, and the tax shelter works in the ordinary way.

What to actually check

Who is the general partner and who owns it. What fees flow to it and on what basis. Whether the limited partners can remove it and on what vote. What happens on a default. And whether the partnership may borrow — because a limited partner's liability is limited, but the value of their interest is not protected from leverage inside the partnership.