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).

Discussion

The general partners

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 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 apparent authority as agents of the firm to bind all the other partners in contracts with third parties. The GPs pay the LPs the equivalent of a dividend on their investment. The nature and extent of this payment will usually be defined in the partnership agreement.

The limited partners

Like shareholders in a corporation, the LPs have limited liability, i.e. they are only liable on debts incurred by the firm to the extent of their registered investment, and they have no management authority. 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.

The limited liability enjoyed by LPs is contingent upon their refraining from taking any active role in the management of the firm. If LPs do assume a management role, they become GPs, and thus lose their limited liability protection and acquire the status of an agent.

The limited partnership in the U.S.

In the United States, the LP organization is most common in the film industry 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 most states, an LP can elect to become a limited liability limited partnership (or LLLP). In this arrangement, every partner is 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. See the Revised Uniform Partnership Act (RUPA) which was finalised by the National Conference of Commissioners on Uniform State Laws in 1994.

The limited partnership in the UK

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

English Law

In English law a distinction should be drawn between a limited partnership and a limited liability partnership. The former are associations of single traders similar to ordinary general partnerships where one or more of the partners has a limited liability in the event of bankruptcy of one of the partners or a law suit being filed. However in English law there must always be at least one general partner who has unlimited liability in a limited partnership. 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.

Limited liability partnerships are a separate class of organisation which are much closer to companies in conception than partnerships.

There has been discussion over whether 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.

Business law | Types of companies | Legal entities