Summary
- A limited partnership in England gives certain partners limited liability capped at their investment amount, but only if they take no active role in managing the partnership, with any involvement in management automatically removing that protection and exposing them to the partnership’s full debts.
- Unlike limited companies and LLPs, limited partnerships do not need to file annual accounts or a partnership agreement with Companies House, though they must disclose partner names, addresses and capital contributions, making them less confidential than general partnerships.
- Limited partnerships are not separate legal entities and cannot own property or enter contracts in their own name, which can make transferring partnership property complex and requires careful structuring from the outset.
- This article is a plain-English guide to the advantages and disadvantages of limited partnerships for business owners in England, written by LegalVision’s business lawyers.
- LegalVision specialises in advising clients on partnership structures, business formation and commercial transactions in the UK.
Tips for Businesses
If you are structuring a limited partnership, define the boundaries between limited and general partner roles clearly in the partnership agreement before the partnership begins operating. A limited partner who crosses into management loses their liability protection immediately, so the distinction needs to be documented and understood by all parties. Take tax advice early, as the tax structuring flexibility of an LP is one of its main commercial advantages.
A limited partnership is a business structure that allows two or more persons to carry on business together under the Limited Partnerships Act 1907, as amended by the Economic Crime and Corporate Transparency Act 2023. It is distinct from a general partnership and a limited liability partnership, each governed by separate legislation. The structure creates two classes of partner: general partners, who manage the business and bear unlimited liability, and limited partners, whose liability is capped at their capital contribution provided they take no part in management. In England, limited partnerships must register with Companies House before they can operate. This article will provide an overview of the pros and cons of a limited partnership in England.
Buying a business? Download this free guide to help you negotiate key terms like price, stock, and employee entitlements.
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.
What the 2023 Act Changed
The Economic Crime and Corporate Transparency Act 2023 introduced significant changes to how limited partnerships register and operate.
Before these reforms, registration requirements were minimal and enforcement was limited. The changes tightened this considerably.
Key changes include:
- general partners must now verify their identity with Companies House before or shortly after registration;
- limited partnerships must maintain a registered office address in England if they operate in England;
- Companies House has new powers to strike off limited partnerships that fail to meet their filing obligations; and
- existing limited partnerships were required to re-register under the new rules within a transitional period.
These changes were introduced primarily to reduce the misuse of limited partnerships for financial crime. In practice, they mean that setting up and maintaining an LP now involves more ongoing compliance than it did previously.
Continue reading this article below the formCall 0808 196 8584 for urgent assistance.
Otherwise, complete this form, and we will contact you within one business day.
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, LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced business lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Are general partnerships and limited partnerships similar?
A partnership agreement governs both general and limited partnerships, and both are unincorporated business structures. The key distinction is that one partner, the general partner, manages the partnership and has unlimited liability for the partnership’s debts. The limited partner is only liable for the amount invested in the partnership.
What are limited partnerships used for?
Private equity and venture capital funds often use the limited partnership model to structure their investment operations because of legal and tax benefits.
What happens if a limited partner gets involved in managing the partnership?
If a limited partner takes an active role in managing the partnership, the law automatically revokes their limited liability. They are then treated as a general partner and become personally liable for all of the partnership’s debts and obligations, not just the amount they originally invested.
What information must a limited partnership file with Companies House?
A limited partnership must disclose the names and addresses of all partners and each partner’s capital contribution. General partnerships have no equivalent filing requirement, making limited partnerships less confidential despite their other advantages.
We appreciate your feedback! Request your free consultation now.
