What is a Limited Partnership in England and Wales?

Partnerships are a common type of business structure in England and Wales. There are general partnerships, limited partnerships, and limited liability partnerships. Indeed, each type of partnership represents a different legal relationship. This article will explain the critical distinction between limited partnerships and other partnerships. It will also explain why people might use limited partnerships in the course of their business. 

General Partnerships vs Limited Partnerships 

The law defines limited partnerships in contrast to general partnerships. Therefore, it is helpful to understand what a general partnership is. 

General Partnerships 

The most basic kind of partnership is a general partnership. General partnerships come about automatically when two or more people are engaged in a common business with a view to sharing profits. 

General partnerships are unincorporated business structures. This means that the partnership cannot own property or be responsible for its own debts. Instead, the partners own property on behalf of other partners and can be sued individually for the partnership’s debts. 

As this piece of law is fairly old, there are some rather strange provisions in this Act. For example, if one of the partners resigns or dies, the partnership is automatically brought to an end. As you can see, automatically ending the partnership is often not the partners’ intention. Therefore, consider your alternatives, like creating a formal partnership agreement. 

General Partnership Agreements 

Partnership agreements are contracts between partners that set out the partnership’s terms. The most common provisions in a partnership agreement include:

• that each partner will contribute an equal amount to the partnership; 
• the amount of profit each partner will receive; 
• when and how each partner will receive profits;
• the amount of money a partner can draw against their share of the profits in advance of receiving the profits; 
• how the partnership will legally hold the property; and 
• the circumstances that allow for the removal or expulsion of partners.

However, certain elements are fundamental to a partnership, and you cannot change or exclude these. Notably, the law says that each partner is jointly liable for the debts and obligations of the general partnership. Each partner is also jointly and severally liable for any partner’s wrongful acts or omissions that arise in business. 

In plain English, if your business partner enters into a contract with another business and fails to fulfill one of the contractual obligations, the other party can come after any of the partners. Financially, this means the law can hold one partner liable for the debts another partner incurs, as long as the debt arose in the course of the partnership. 

In some cases, this may not be desirable. For these reasons, the law gives us limited partnerships.

Limited Partnerships 

Limited partnerships must contain at least one general partner (GP) and one limited partner (LP). 

The limited partner will only be liable for the debts the general partner has incurred up to a pre-agreed amount of money, provided that the limited partner does not actively manage the partnership. 

In other words, in exchange for contributing a specified amount of money to the partnership, a limited partner will receive a percentage of the profits. Likewise, they will not be liable for any more than the amount the LP has invested in the partnership. 

Formalities to Create a Limited Partnership

Compared to other business structures, such as companies, a limited partnership benefits from considerably more flexibility. Likewise, there are minimal disclosure and reporting requirements. 

However, unlike a general partnership, it does not come about automatically. You will have to file some paperwork with Companies House, the public body in charge of administering many kinds of businesses in the UK. 

Additionally, you need to disclose certain information, though far less than in comparison to creating a company. On the application, you will only need to list:

• your partnership’s name; 
• the nature of the business; 
• the partnership’s address; 
• how long the partnership will last for, if not indefinitely; 
• names and signatures of each of the general partners and limited partners; and 
• the amount of money the limited partner contributed to the partnership. 

Companies and Limited Liability Partnerships (LLPs) can also be partners to a limited partnership. 

Practical Uses for LPs

People will often use a limited partnership in large investment ventures between groups of different individuals. Common examples include venture capital and private equity funds. Such investment funds operate by raising money from a group of people with the idea of later purchasing ownership in other companies by buying shares in these companies. 

Venture capital and private equity funds require someone who knows where to invest the capital. These investment professionals are commonly referred to as the investment house (‘PE house’ or ‘VC house’).

When it comes time to pool the money together to purchase another company,  the investment house will create an account where all the other investors deposit their money. This account is, in effect, a limited partnership. The outside investors are the limited partner, and the investment house is the general partner.

Advantages of Using an LP

Investing Passively

You may have a lot of money lying around that you want to invest to generate strong returns. However, you may be uncertain where to put the money. A limited partnership lets you contribute your money to a legally recognised entity (the limited partnership) without obligating you to manage the partnership. 

Limited Liability 

As with all instances where limited liability is available, it is often the preferable alternative. For example, if you hand your money off to a professional investor, while you are probably expecting to get back more than you give them, you certainly would not want to be told you have to pay even more money because they made a mistake. 

In the event the general partner of the fund makes a mistake, costing another person lots of money, you will only be liable for the amount of your investment. 

Privacy 

Unlike the documents you must file with Companies House to incorporate a company or a limited liability company, the partnership agreement between the limited and general partners are not available to the public. 

So, if you are investing large sums of money or do not want to disclose the aims of the investment project, this degree of privacy may be preferable. 

Tax Implications

Importantly, a limited partnership is not an incorporated entity. So, the law treats any profits you make from the partnership as being owed to the partners themselves. This avoids situations where profits would be taxed twice: once at the point of leaving the partnership and once again if the profits then go on to a company to be dispersed as dividends. 

Key Takeaways 

A limited partnership is an unincorporated business structure similar to a general partnership in that a partnership agreement governs it. The difference is that there must be at least one general partner responsible for managing the business and who bears unlimited liability for any losses. Likewise, at least one limited partner must contribute money to the business in exchange for a share of the profits. So long as the limited partner does not participate in the management of the business, they are not liable for its debts beyond their initial investment. In practice, limited partnerships are common ways for investment funds to structure their investment activities. 

If you need help understanding how to set up a limited partnership, our experienced corporate 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 at 0808 196 8584 or visit our membership page.

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