Pros & Cons of a Limited Partnership in England

If you are considering starting a business with one or more like-minded individuals, you might benefit from operating as a partnership. A limited partnership is a particular kind of partnership business structure. This structure has certain advantages, such as limited liability for certain partners, and disadvantages, like restrictions on what the limited partners can do in the partnership. This article will provide an overview of the pros and cons of a limited partnership in England.

What is a Limited Partnership?

A limited partnership (LP) is its own form of partnership. It is distinct from general partnerships and LLPs and has its own set of laws that governs how they are run. 

Like general partnerships, LPs are not separate legal entities. That is, the LP cannot own property or enter into contracts. Instead, all property is owned jointly by the partners, with general partners typically having the legal title to the property. 

However, unlike a general partnership, one class of partners (limited partners) gain the benefit of limited liability provided they abstain from managing the partnership’s affairs. It follows that their liability is capped at the amount they invest in the partnership. On the other hand, the general partners remain fully liable for the partnership’s debts, largely because they are involved with the management of the partnership. 

An Example 

Suppose you own a company, YouCo Ltd, involved in manufacturing special widgets. You and the other shareholder-directors agree to reinvest the bulk of the profits rather than pay out all the profits as dividends. However, YouCo does not see any obvious businesses to acquire or means to expand immediately. 

Therefore, YouCo’s management decides to invest the money in a high-risk, high-return venture. You come across a boutique investment firm specialising in private equity transactions. In exchange for giving them the investment capital, they agree to manage it for a small fee. To demonstrate the firm’s confidence in its investment strategy, they agree to commit its own funds worth 40% of the total investment pool. 

In such a case, a limited partnership may be the best vehicle for you and the boutique investment firm to structure your commercial relationship. 

Pros

Limited Liability for Certain Partners

Certain partners benefit from limiting their liability to the amount of their investment in the partnership. However, this benefit is conditional on them not taking any active role in the partnership. 

Relatively Confidential

Compared to a limited company and LLPs, general partnerships are more confidential. Chiefly, the LP does not have to:

• file annual accounts or confirmation statements with Companies House; or
• submit any constitutional document such as its partnership agreement.

Flexibility 

LPs enjoy flexibility when it comes to various partners negotiating their relationships with one another. Provided all the partners maintain the distinction between limited and general partners, they are broadly free to contract with one another as they wish. 

Separately, any person can become a partner in an LP. This includes individuals in their personal capacity and body corporates like companies and LLPs. 

Tax Advantages 

The law permits LPs to structure their tax liability and the liability of its partners quite efficiently.

Cons

Restrictions on Limited Partners

The biggest trade-off limited partners make in exchange for obtaining limited liability is that they must not be involved in managing the partnership. 

As a result, they are at the mercy of the general partners to ensure that the partnership meets its objectives. They cannot intervene, such as to authorise a transaction or sell partnership property. If they do, the law automatically revokes their limited liability and treats them as if they are general partners. Consequently, they can be pursued for all of the partnership’s debts and other obligations. 

Less Confidentiality

Since certain partners are shielded from the full extent of the partnership’s debts, the law requires the LP to make certain disclosures to the public through Companies House. These include:

• the names of all the partners; 
• each of the partners’ capital contributions; and
• their addresses.

For general partnerships, they do not have to file this information.

Not a Legal Entity

LPs are not legal entities. They cannot own property, nor can they enter into contracts. In this sense, they are like general partnerships.

From a legal perspective, the absence of incorporation means that ownership is governed by the law of equity and trusts. Practically, this means that transferring partnership property can become quite complex. 

Key Takeaways 

A limited partnership combines some of the most favourable aspects of other business structures. Most notably, provided certain partners abstain from managing the partnership, they benefit from limited liability. Of course, at least one partner must act as a general partner to manage the business, thereby assuming full liability for the partnership’s debt. At the same time, all the partners benefit from the flexibility found in all partnerships because the partnership is governed by the terms of an agreement between the partners. However, limited partnerships are not as confidential as general partnerships because the partners must file certain documents with Companies House. Additionally, the law takes a strict view on limited partners abstaining from any management. If limited partners act as general partners, they will lose their limited liability. 

If you need help understanding how to set up a limited partnership, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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