For serious Canadian real estate investors, understanding the GP/LP pros and cons for founders is essential to making informed decisions. These decisions can propel your projects forward while optimizing your tax and legal situations. So, let’s embark explore the ins and outs of the GP/LP (General Partner/Limited Partner) structure and its implications for founders in Canada.
Video Transcript: GP/LP pros and cons for founders
In terms of pros and cons of using the GP and LP structure. Let’s think about this from the founders perspective.
I’m George Dube, saving the world from tax one bowtie at a time.
GP/LP pros for founders
- Larger and/or more diverse projects
- Control of projects
- One less reason for an investor to say no due to the flexibility of flow-through.
First, and again, different people will have different areas of focus, but it allows the founders, probably speaking, to be getting involved in larger projects. Perhaps even more diversification than they otherwise would be.
It allows the founders an opportunity to control a project.
It allows the founders an opportunity to have one less reason for an investor to say no.
Because they’re going to be able to tailor their own specific tax and legal situation to their best benefit, as compared to the structure you may be otherwise creating. That flexibility may allow for you to really get the attention of more investors.
Converting a GP/LP structure to a REIT
An add-on benefit for founders of a GP LP structure is what the structure itself could change into down the road. It’s possible, perhaps it sounds frightening initially, but it’s possible we may want to change into a private REIT, a real estate investment trust. Maybe even won a public one down the road. But starting with the GP/LP structure, allows you to more tax efficiently, potentially, depending how you’re trying to do things and what you’re expecting for those initial investors. It may be more tax efficient to change or to evolve into that private REIT. And it sounds intimidating, I acknowledge. The REIT may allow you to get after registered funds. Think of RRSP, TFSA money. The REIT may also allow, quite simply, just more investors to be coming in. It also clearly is a different status, so there’s more cost, unquestionably, to setting up a REIT and maintaining the REIT. Significantly more than just a GP/LP. But the GP/ LP structure keeps doors open for that tax efficient change that might happen down the road.
GP/LP cons for founders
- More costs.
- More complexity.
- Forced to use December 31st year-ends
- And, as a result, tighter reporting deadlines.
On the opposite side, there’s some more costs involved, no question. A little bit more of a pain in the rear end factor. In using that GP/LP structure, there’s more costs as a result of the complexity. But if that’s the difference between getting a project on or off the ground, the cost is relatively minor. Particularly if the founders are using this as an opportunity to build a framework for future developments and future projects.
You’re going to be forced to use December 31st year ends from a practical perspective.
And the deadlines for reporting are going to be tighter, as compared to using corporations. That all said, if you’re using other people’s money for your investments, it’s not like you had a lot of leeway if you’re using a corporate structure, for example. This is simply going to ensure, essentially, within 90 days of the year end, your reporting is ready to go.
If you want to learn more about this topic, check out our GP/LP playlist. Or head over to my website georgeEdube.com.
No question, this series of recordings on the GP/LP structuring, very high level, not a lot of detail. Please feel free to reach out, set up a time to talk further and we can get into the nuts and bolts for what’s right in your specific situation.
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Resources
For additional resources related to the GP/LP pros and cons for founders, please see:
- What is a GP/LP structure?
- GP/LP structure growth: Simple to complex
- How to set up a GP/LP structure
- Who should set up a GP/LP structure?
- GP/LP tax benefits for founders
Back to: GP/LP structure: Ultimate guide for Canadian real estate investors
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Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.
