Definitions

Limited partnership

Limited partnership

A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs).

The GPs are, in all major respects, in the same legal position as partners in a conventional firm, i.e. they have management control, share the right to use partnership property, share the profits of the firm in predefined proportions, and have joint and several liability for the debts of the partnership.

As in a general partnership, the GPs have actual authority as agents of the firm to bind all the other partners in contracts with third parties that are in the ordinary course of the partnership's business. As with a general partnership, "An act of a general partner which is not apparently for carrying on in the ordinary course the limited partnership's activities or activities of the kind carried on by the limited partnership binds the limited partnership only if the act was actually authorized by all the other partners." (United States Uniform Limited Partnership Act § 402(b).)

Like shareholders in a corporation, LPs have limited liability, meaning they are only liable on debts incurred by the firm to the extent of their registered investment and have no management authority. The GPs pay the LPs a return on their investment (similar to a dividend), the nature and extent of which is usually defined in the partnership agreement.

Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability.

Limited liability

When the partnership is being constituted or the composition of the firm is changing, LPs are generally required to file documents with the relevant state registration office. LPs must also explicitly disclose their LP status when dealing with other parties, so that such parties are on notice that the individual negotiating with them carries limited liability. It is customary that the notepaper, other documentation, and electronic materials issued to the public by the firm will carry a clear statement identifying the legal nature of the firm and listing the partners separately as general and limited. Hence, unlike the GPs, the LPs do not have inherent agency authority to bind the firm unless they are subsequently held out as agents and so create an agency by estoppel or acts of ratification by the firm create ostensible authority.

Prior to 2001, the limited liability enjoyed by LPs was contingent upon their refraining from taking any active role in the management of the firm. However, Section 303 of the Revised Uniform Limited Partnership Act eliminates the so-called "control rule" with respect to personal liability for entity obligations and brings limited partners into parity with LLC members, LLP partners and corporate shareholders.

The 2001 amendments to the Uniform Limited Partnership Act also permitted limited partnerships to become Limited Liability Limited Partnerships. Under this form, debts of a limited liability limited partnership are solely the responsibility of the partnership, thereby removing general-partner liability for partnership obligations. This was in response to the common practice of naming a limited-liability entity as a 1% general partner that controlled the limited partnership and organizing the managers as limited partners. This practice granted a limited partnership de facto limited liability under the partnership structure. For a discussion on this practice and background on the modification of GP liability, see Thomas E. Geau & Barry B. Nekritz, Expectations for the Twenty-First Century: An Overview of the New Limited Partnership Act, 16 Probate & Property 47, 48-49 (2002).

History

The societates publicanorum which arose in Rome in the 3rd century BC may have arguably been the earliest form of limited partnership. During the heyday of the Roman Empire they were roughly equivalent to today's corporations: some had many investors, and interests were publicly tradable. However, they required at least one (and often several) partners with unlimited liability.

The Qirad and Mudaraba institutions in Islamic law and economic jurisprudence were more similar to the modern limited partnership. These were developed in the medieval Islamic world, when Islamic economics flourished and when early trading companies, big businesses, contracts, bills of exchange and long-distance international trade were established.

In medieval Italy, the Qirad and Mudaraba concepts were adapted in the 10th century as the commenda, a business organization which was generally used for financing maritime trade. In a commenda, the traveling trader of the ship had unlimited liability, but his investment partners on land were shielded. A commenda was not a common form for a long-term business venture as most long-term businesses were still expected to be secured against the assets of their individual proprietors.

Colbert's Ordinance of 1673 and the Napoleonic Code of 1807 reinforced the limited partnership concept in European law. In the United States, limited partnerships became widely available in the early 1800s, although a number of legal restrictions at the time made them unpopular for business ventures. Britain enacted its first limited partnership statute in 1907.

Regional variations

For a list of types of corporation and other business types by country, see Types of business entity.

United States

In the United States, the LP organization is most common in the film industry and real estate investment projects or in types of businesses that focus on a single or limited-term project. They are also useful in "labor-capital" partnerships, where one or more financial backers prefer to contribute money or resources while the other partner performs the actual work. In such situations, liability is the driving concern behind the choice of LP status. The LP is also attractive to firms wishing to provide shares to many individuals without the additional tax liability of a corporation. Private equity companies almost exclusively use a combination of general and limited partners for their investment funds. Well-known limited partnerships include Carnegie Steel Company, Bloomberg L.P. and CNN.

In some states, an LP can elect to become a limited liability partnership (or LLP). In this arrangement, the general partners are liable only for the business debts of the company, and not for acts of malpractice or other wrongdoing done by the other partners in the course of the partnership's business.

United Kingdom

In the United Kingdom limited partnerships are governed by the Limited Partnership Act 1907 However, English law and Scottish law are distinct on partnerships.

In English law, limited partnerships are not legally separate entities: the partners are jointly and severally liable and any law suits filed are filed against the partners by name. There has been discussion over whether limited partnerships operating under English law should be made separate legal entities in the same way as limited liability partnerships are. The Law Commission report on partnership law LC283 suggests that creation of separate legal personality should be left as an option for the partners to decide upon when a partnership is formed. There are concerns that automatically making partnerships separate legal entities would restrict their ability to trade in some European countries and also expose them to different tax regimes than expected.

Japan

Japanese law has historically provided for two business forms similar to limited partnerships:

  • Goshi gaisha, a form of close corporation (mochibun kaisha) with unlimited liability for certain shareholders
  • Tokumei kumiai (lit. "anonymous partnerships"), a form of partnership in which non-operating partners have limited liability so long as they remain anonymous

In 1999, the Diet of Japan passed legislation enabling the formation of . These are very similar to Anglo-American limited partnerships, in that they adopt most provisions of general partnership law but provide for limited liability for certain partners. Profits of an investment LP pass through to all partners proportional to their investment share. For tax purposes, profits and losses will only pass through to the general partner(s) while the partnership has negative equity (i.e. liabilities exceeding assets); however, profits and losses while the partnership has positive equity are shared equally.

New Zealand

In New Zealand, Limited Partnerships are a form of partnership involving General Partners, (who are liable for all the debts and liabilities of the partnership) and Limited Partners (who are liable to the extent of their capital contribution to the partnership). The Limited Partnerships Act replaces Special Partnerships that exist under Part 2 of the Partnership Act 1908. Special partnerships are considered obsolete as they do not provide the appropriate structure preferred by foreign venture capital investors.

Features of Limited Partnerships include:

  • a list of activities that the limited partners can be involved in while not participating in the management of the Limited Partnership (safe harbour activities)
  • an indefinite lifespan if desired
  • separate legal personality
  • tax treatment for Limited Partnerships.

The registers of Limited Partnerships and Overseas Limited Partnerships are administered by the New Zealand Companies Office. Registration, maintenance and annual return filing for Limited Partnerships and Overseas Limited Partnerships are conducted through manual forms. More information on New Zealand Limited Partnerships administration can be found on the Limited Partnerships homepage

See also

References


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