Introduction to Limited Partnerships
Limited Partnerships (LP) are formed and regulated in accordance with the Limited Partnerships Act 1907 (LPA) (although common law and the PA 1890 are still applicable to LPs). Essentially, an LP is an ordinary partnership but with certain modifications under the LPA.
The main difference between an ordinary (traditional) partnership and an LP is that some partners in an LP have limited liability for the debts and obligations of the partnership. Like partnerships (but unlike LLPs), LPs are not separate legal entities.
The PA 1890 applies to LPs except where inconsistent with the LPA. For example, if there is no agreement as to a profit sharing ratio, all partners share equally under s.24(1) PA 1890.
LPs require the involvement of at least two partners:
- at least one general partner; and
- at least one limited partner.
Nature of liability
A general partner’s liability is always unlimited. This reflects the fact that the general partner manages the business.
Limited partners have limited liability, up to the amount of their contribution to the LP (s.4(2) LPA). Importantly, however, this only applies if they are not involved in the day-to-day management of the partnership (s.6 LPA).
This makes LPs a useful vehicle for investment funds, where the general partner manages the fund and investors are protected from any liability by becoming only limited partners.
Roles of general and limited partners
The LPA does not describe what the general partners may do. Rather it focuses on what the limited partners cannot do. For example, the limited partners have no power to bind the firm. It is important that the management of the business is in the hands of the general partner(s) only. (Contrast the position of an ordinary partnership where management is in the hands of all the partners under s.24(5) PA 1890). If a limited partner takes part in the management of the partnership business he shall be liable for all debts and obligations during this period as if he were a general partner (s.6(1) LPA).
A general partner in a limited partnership is more akin to a managing director than to an ordinary partner on equal terms with the other partners.
The limited partners must agree before any changes are made to matters such as profit share, expulsion of partners, alteration in the nature of the partnership business and variation in the partnership agreement. These cannot be changed by the general partner alone.
Registration of LPs
LPs must be registered at Companies House under ss.5, 8 and 8A LPA. Limited partners in an LP that fails to be correctly registered forfeit their limited status and will be treated as partners in ordinary partnerships.
The information which needs to be filed (and updated when it changes) by an LP includes the firm’s name, the general nature of its business, the principal place of business, the names of the partners and the sum contributed by any limited partner (s.9 LPA). Under s.8B LPA all new limited partnerships must expressly include ‘Limited Partnership’ or ‘LP’ or the equivalent at the end of their names. The Registrar is required to issue a certificate of registration as conclusive evidence that the LP has been formed and registered (s.8C LPA). As with the Companies Register, the register of LPs is available for public inspection. LPs are registered with form LP5, which can be viewed on the www.gov.uk website.
Importantly, an LP need not file annual accounts or confirmation statements.
Dissolution of LPs
A limited or a general partner may dissolve the LP under a provision in the partnership agreement and the law relating to ordinary partnership dissolution will generally apply to LPs. One exception is that a limited partner may not dissolve the LP by notice if the LP is a partnership at will, without agreement from all the other partners (a general partner may however do so (s.6(5) LPA)).
Use of LPs
You may encounter LPs only rarely in practice unless you work with venture capital funds, private equity or real estate investment vehicles, which are often run through LPs.
In a venture capital partnership, investors (the limited partners) advance money, to be placed for them by the general partner (often referred to as a manager) in commercial ventures in need of finance. The manager will charge a fee and will receive a share of the profit. The LP vehicle is suitable as the majority of investors in a venture capital fund are passive investors and will not participate in the management of the fund.
LPs are the vehicle of choice for private equity fundraising. They are tax transparent and highly flexible: the partners can write their own internal partnership rules without having to conform to the detailed requirements of CA 2006.
In recent years, the limited partnership regimes in other jurisdictions have become more attractive to fund managers. The Treasury proposed a number of reforms to the UK regime to improve the UK’s competitiveness in this market. As a result, in April 2017 a new sub-type of LP, the Private Fund Limited Partnership (PFLP), was created (under the Legislative Reform (Private Fund Limited Partnerships) Order 2017) to reduce some of the administrative burdens on private investment funds which are structured as LPs.