Limited partnership

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A limited partnership (LP) is a form of partnership similar to a general partnership except that while a general partnership must have at least two general partners (GPs), a limited partnership must have at least one GP and at least one limited partner. [1] Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability.

Contents

The GPs are, in all major respects, in the same legal position as partners in a conventional firm: 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 the partnership 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." [2]

Background of limited liability

Like shareholders in a corporation, limited partners have limited liability. This means that the limited partners have no management authority, and (unless they obligate themselves by a separate contract such as a guarantee) are not liable for the debts of the partnership. The limited partnership provides the limited partners a return on their investment (similar to a dividend), the nature and extent of which is usually defined in the partnership agreement. General Partners thus bear more economic risk than do limited partners, and in cases of financial loss, the GPs will be the ones which are personally liable.

Limited partners are subject to the same alter-ego piercing theories as corporate shareholders. However, it is more difficult to pierce the limited partnership veil because limited partnerships do not have many formalities to maintain. So long as the partnership and the members do not co-mingle funds, it would be difficult to pierce the veil.[ citation needed ] In some jurisdictions (for instance in the UK), the limited liability of the limited partners is contingent on their not participating in management.

Partnership interests (including the interests of limited partners) are afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor's share of distributions, without conferring on the creditor any voting or management rights.[ citation needed ]

When the partnership is being constituted, or the composition of the firm is changing, limited partnerships are generally required to file documents with the relevant state registration office. Limited partners must explicitly disclose their 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 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 limited partners 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.

History

The societates publicanorum, which arose in Rome in the third 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. [3] A very similar form of partnership was present in Arabia at the time of the coming of Islam (c.700CE), and this became codified into Islamic law as Qirad.

Development in early modern Europe

In medieval Italy, a business organization known as the commenda appeared in the 10th century that was generally used for financing maritime trade. In a commenda, the traveling trader of the ship had limited liability, and was not held responsible if money was lost as long as the trader had not violated the rules of the contract. In contrast, his investment partners on land had unlimited liability and were exposed to risk. 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. [4] As an institution, the commenda is very similar to the qirad but whether the qirad transformed into the commenda, or the two institutions evolved independently cannot be stated with certainty. [5] In the Mongol Empire, the contractual features of a Mongol-ortoq partnership closely resembled that of qirad and commenda arrangements, however, Mongol investors were not constrained using uncoined precious metals and tradable goods for partnership investments and executed money-lending. [6] Moreover, Mongol elites formed trade partnerships with merchants from Italian cities, including Marco Polo's family. [7]

Colbert's Ordinance (1673) and the Napoleonic Code (1807) reinforced the limited partnership concept under European law. In the United States, limited partnerships became widely available in the early 19th century, although a number of legal restrictions at the time made them unpopular for business ventures. Britain enacted its first limited partnership statute in 1907. [8]

Worldwide

Denmark

A kommanditselskab (abbreviated K/S) is the Danish equivalent of the limited partnership. The owners are divided into general partners (komplementarer in Danish) and limited partners (kommanditister in Danish). Often the only general partner of a K/S is an Anpartsselskab with the least possible capital, thus reducing the liability of the K/S to the capital of the Anpartsselskab.

Germany

Kommanditgesellschaft auf Aktien – abbreviated KGaA – is a German corporate designation standing for 'partnership limited by shares', a form of corporate organization roughly equivalent to a master limited partnership. A Kommanditgesellschaft auf Aktien has two types of participators. It has at least one partner with unlimited liability (Komplementär). It is in that sense a private company. Komplementärs are natural persons or legal persons. If the Komplementär is a corporation with limited liability then the type of the company has to be named as UG (haftungsbeschränkt) & Co. KGaA, GmbH & Co. KGaA, AG & Co. KGaA or SE & Co. KGaA. [9] Under consideration of the aspects of European freedom of establishment it is also possible that corporations established under foreign law can become Komplementärs of a KGaA forming companies like Limited & Co. KGaA.

The investment of the partners with limited liability (Kommanditisten) is the stock of the company (Grundkapital) and divided into shares. A KGaA is in that aspect comparable with a German Aktiengesellschaft .

The investment of all partners is the corporate's total capital (Gesamtkapital). The KGaA is a traditional type of very large family businesses (that are partly publicly traded) in Germany; the consumer products giant Henkel, pharmaceutical company Merck and media conglomerate Bertelsmann are prominent examples. [10] In case of Merck, besides the owning family Merck also the members of the executive board are fully and privately liable for the company (including a period after withdrawal). Also the German football club Borussia Dortmund uses this corporate organization (as Borussia Dortmund GmbH & Co KGaA) for its professional football team as part of its compliance with the "50+1 rule".

Hong Kong

Hong Kong offers two forms of limited partnerships, namely limited partnerships governed by the Limited Partnership Ordinance and limited partnership funds, known as "LPFs", governed by the Securities and Futures Ordinance. Neither limited partnerships nor LPFs are separate and distinct legal persons. Instead, they are simply partnerships of persons, some of whom enjoy limited liability as a result of compliance with statutory requirements. Like many other jurisdictions, the partners who enjoy such limited liability are known as limited partners and their limited liability is contingent upon them not taking an active role in the management of the partnership. [11]

LPFs were introduced in 2020 and are intended to provide a domestic Hong Kong vehicle for private equity funds. [12]

Japan

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

In 1999, the Diet of Japan passed legislation enabling the formation of "limited partnerships for investment" (投資事業有限責任組合, tōshi jigyō yūgen sekinin kumiai). 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 limited partnership 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 2008 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:

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.

United Kingdom

Limited Partnerships Act 1907
Act of Parliament
Coat of arms of the United Kingdom (1901-1952).svg
Long title An Act to establish Limited Partnerships.
Citation 7 Edw. 7. c. 24
Dates
Royal assent 28 August 1907
Status: Amended
Text of statute as originally enacted
Text of the Limited Partnerships Act 1907 as in force today (including any amendments) within the United Kingdom, from legislation.gov.uk.

In the United Kingdom, limited partnerships are governed by the Limited Partnerships Act 1907 and, on matters on which that Act is silent, also by the Partnership Act 1890. The UK Department for Business, Enterprise and Regulatory Reform (now the Department for Business and Trade) consulted in 2008 on proposals to modify and merge the two Acts, [13] but the proposals did not go ahead.

Scots law on partnerships (including limited partnerships) is distinct from English law. Under Scots law, partnerships are legal persons distinct from the partners. [14] However, lawsuits may still be filed against the partners by name, [14] the general partners are still exposed to 'pass-through' liability, and partners are still jointly and severally liable (although in the case of limited partners, only to the extent of their capital contribution). There has been discussion over whether limited partnerships operating under English law should be made separate legal entities as under Scots law, and in the same way as limited liability partnerships are. The Law Commission report on partnership law LC283 suggested that creation of separate legal personality should be left as an option for the partners to decide upon when a partnership is formed. There were 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.

Private Fund Limited Partnerships

The Legislative Reform (Private Fund Limited Partnerships) Order 2017 made provision for partners to register their limited partnership as a "Private Fund Limited Partnership" (PFLP), which is available for collective investment schemes constituted by an agreement in writing. [15] The order relaxed the rules applying to private fund partnerships in order to remove some uncertainty in the application of the law, reduce administrative costs, and help ensure "that the UK remains an attractive and competitive location for private investment funds in comparison to other jurisdictions". [16] The relaxation of the law in relation to PFLPs was welcomed by the financial industry. [17]

United States

In the United States, the limited partnership organization is most common among film production companies 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 limited partnership status. The limited partnership 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 Enterprise Products and Blackstone Group (both of which are public companies), and Bloomberg L.P. (a private company).

Before 2001, the limited liability enjoyed by limited partners 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 (if adopted by a state legislature) 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 (to the extent the amendments are adopted by state legislature) also permitted limited partnerships to become limited liability limited partnerships in states that adopt the change. 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 change was made 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 general partner de facto limited liability under the partnership structure. [18]

See also

Related Research Articles

Business is the practice of making one's living or making money by producing or buying and selling products. It is also "any activity or enterprise entered into for profit."

<i>Gesellschaft mit beschränkter Haftung</i> "Company with limited liability" in German-speaking countries

Gesellschaft mit beschränkter Haftung, abbreviated GmbH in Germany, Switzerland and Liechtenstein, and as Ges.m.b.H. in Austria, is a type of legal entity. In the French-speaking part of Switzerland, this is equivalent to a société à responsabilité limitée (Sàrl) and in the Italian-speaking part, a Società a garanzia limitata (Sagl).

<span class="mw-page-title-main">Partnership</span> Arrangement in which parties agree to cooperate to advance their mutual interests

A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or combinations. Organizations may partner to increase the likelihood of each achieving their mission and to amplify their reach. A partnership may result in issuing and holding equity or may be only governed by a contract.

<span class="mw-page-title-main">Joint-stock company</span> Business entity which is owned by shareholders

A joint-stock company is a business entity in which shares of the company's stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares. Shareholders are able to transfer their shares to others without any effects to the continued existence of the company.

A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to access a new market, particularly emerging market; to gain scale efficiencies by combining assets and operations; to share risk for major investments or projects; or to access skills and capabilities.

<span class="mw-page-title-main">Limited liability partnership</span> Partnership in which some or all partners (depending on the jurisdiction) have limited liabilities

A limited liability partnership (LLP) is a partnership in which some or all partners have limited liabilities. It therefore can exhibit aspects of both partnerships and corporations. In an LLP, each partner is not responsible or liable for another partner's misconduct or negligence. This distinguishes an LLP from a traditional partnership under the UK Partnership Act 1890, in which each partner has joint liability. In an LLP, some or all partners have a form of limited liability similar to that of the shareholders of a corporation. Depending on the jurisdiction, however, the limited liability may extend only to the negligence or misconduct of the other partners, and the partners may be personally liable for other liabilities of the firm or partners.

<span class="mw-page-title-main">Private limited company</span> Type of company used in many jurisdictions

A private limited company is any type of business entity in "private" ownership used in many jurisdictions, in contrast to a publicly listed company, with some differences from country to country. Examples include the LLC in the United States, private company limited by shares in the United Kingdom, GmbH in Germany and Austria, Besloten vennootschap in The Netherlands, société à responsabilité limitée in France, and sociedad de responsabilidad limitada in the Spanish-speaking world. The benefit of having a private limited company is that there is limited liability. However, shares can only be sold to shareholders in the business, which means that it can be difficult to liquidate such a company.

<span class="mw-page-title-main">General partnership</span> Basic form of partnership under common law

A general partnership, the basic form of partnership under common law, is in most countries an association of persons or an unincorporated company with the following major features:

<i>Kommanditgesellschaft</i> German name for a limited partnership business entity

A Kommanditgesellschaft is the German name for a limited partnership business entity and is used in German, Belgian, Dutch, Austrian, and some other European legal systems. In Japan, it is called a gōshi gaisha. Its name derives from the commenda, an early Italian medieval form of limited partnership.

<span class="mw-page-title-main">HSBC Trinkaus</span>

HSBC Trinkaus & Burkhardt AG, operating as HSBC Deutschland, is a German financial services company. It traces its history back to 1785 and is one of the longest-established members of the HSBC Group. HSBC in Germany has operations in private, commercial and investment banking and asset management. HSBC has announced it would transfer ownership of HSBC Trinkhaus from UK-based HSBC Bank plc to Paris-based HSBC Continental Europe then to convert it into a branch of HSBC Continental Europe by end-2023.

In the United States, a master limited partnership (MLP) or publicly traded partnership (PTP) is a publicly traded entity taxed as a partnership. It combines the tax benefits of a partnership with the liquidity of publicly traded securities.

There are many ways in which a business may be owned under the legal system of England and Wales.

<span class="mw-page-title-main">Kommanditselskab</span>

A kommanditselskab is the Danish equivalent of the limited partnership. The owners are divided into general partners and limited partners. Often the only general partner of a K/S is an Anpartsselskab with the least possible capital, thus reducing the liability of the K/S to the capital of the Anpartsselskab.

General partner is a person who joins with at least one other person to form a business. A general partner has responsibility for the actions of the business, can legally bind the business and is personally liable for all the partnership's debts and obligations.

The qirad was one of the basic financial instruments of the medieval Islamic world. It was an arrangement between one or more investors and an agent where the investors entrusted capital to an agent who then traded with it in hopes of making profit. Both parties then received a previously settled portion of the profit. The agent was not liable for any losses, provided these did not exceed the capital subscribed.

United Kingdom partnership law concerns the way that partnerships are formed or governed within the United Kingdom. Depending upon where the partnership was formed, English law, Scots law or Northern Irish law may apply in addition to statutes that create a framework across the UK. Under Scots law a partnership is a distinct legal entity and can borrow money from a bank in the name of the partnership, while English law only allows borrowing in the names of individual partners. Partnerships are a form of business association, which arises automatically when people carry on business with a view to a profit. Partners are jointly and severally liable, just as they own the property in common.

A partnership limited by shares is a hybrid between a partnership and a limited liability company. The capital and ownership of the company is divided between shareholders who have a limited liability and one or more partners who have full liability for the remainder of the company's debts. The partner(s) will usually direct the operations of the company while the shareholders are passive investors.

<span class="mw-page-title-main">Corporate law in Vietnam</span>

Corporate law in Vietnam was originally based on the French commercial law system. However, since Vietnam's independence in 1945, it has largely been influenced by the ruling Communist Party. Currently, the main sources of corporate law are the Law on Enterprises, the Law on Securities and the Law on Investment.

A Special Limited Partnership or SLP is the Luxembourg version of the similar British Limited Partnership.

References

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  2. United States Uniform Limited Partnership Act § 402(b)
  3. Malmendier, Ulrike; Societas publicanorum: staatliche Wirtschaftsaktivitäten in den Händen privater Unternehmer ; Böhlau Verlag; Cologne, FRG; 2002
  4. Law and the Rise of the Firm Archived 2007-02-24 at the Wayback Machine ; 119; Harvard Library; Rev.; Henry Hansmann, Reinier Kraakman, and Richard Squire; p. 1333; 2006
  5. Hillman, Robert H.; Limited Liability in Historical Perspective, "Washington and Lee Law Review," Spring 1997
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  7. Enkhbold op cit pp. 7
  8. Entity Shielding and the Development of Business Forms: A Comparative Perspective Archived 2007-02-24 at the Wayback Machine ; p. 119; Harvard Library; Rev. F.; Lamoreaux, Naomi R. and Rosenthal, Jean-Laurent; p. 238 (2006).
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  10. "Company Overview of DORMA Holding GmbH + Co. Kommanditgesellschaft auf Aktien". Businessweek. Archived from the original on July 10, 2012. Retrieved 2 July 2013.
  11. "Types of Partnerships - Timothy Loh Corp Services". www.timothylohcs.com. Retrieved 2021-01-12.
  12. Cumming, Timothy Loh, Gavin. "Private Equity in Hong Kong - Fund Formation - Timothy Loh LLP". www.timothyloh.com. Retrieved 2021-01-12.{{cite web}}: CS1 maint: multiple names: authors list (link)
  13. "The Legislative Reform (Limited Partnerships) Order 2009: Explanatory Document" (PDF). UK Department for Business, Enterprise & Regulatory Reform. June 2009. Archived from the original on 2012-12-12.{{cite web}}: CS1 maint: bot: original URL status unknown (link)
  14. 1 2 "Partnership Act 1980 s. 4".
  15. Limited Partnerships Act 1907, section 8D(3), inserted by Section 2 of the Legislative Reform (Private Fund Limited Partnerships) Order 2017, accessed 28 February 2023
  16. Travers Smith LLP, Reform of UK Limited Partnership Law, published 21 April 2017, accessed 28 February 2023
  17. Atrium Legal Lab, UK Private Fund Limited Partnerships, accessed 9 March 2023
  18. 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).