Limited partnership
Encyclopedia
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). It is a partnership in which only one partner is required to be a general partner.
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 debt
s 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 contract
s 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."
Like shareholder
s 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. General Partners thus carry more liability, and in cases of financial loss, the GPs will be liable.
Limited partnerships are distinct from limited liability partnership
s, in which all partners have limited liability.
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.
In some jurisdictions, the limited liability of the LPs is contingent on their not participating in management.
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 corporation
s: 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 business
es, contract
s, bills of exchange and long-distance international trade
were established.
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 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. 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.
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 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.
, the LP organization is most common among law firms, accounting firms, film production companies
, finance firms 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 Enterprise Products
and Blackstone Group
(both of which are public companies
), and Bloomberg L.P.
(a private company).
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 Partnership
s. 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.
limited partnerships are governed by the Limited Partnerships Act 1907. The UK government department of Business, Enterprise and Regulatory Reform (now the Department for Business Innovation and Skills) consulted in 2008 on proposals to modify and merge the Act with the Partnership Act 1890, but the proposals did not go ahead http://www.bis.gov.uk/files/file51586.pdf, and the 1907 Act remains the governing Act.
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 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.
has historically provided for two business forms similar to limited partnerships:
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 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.
, 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:
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.
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
similar to a general partnership
General partnership
In the commercial and legal parlance of most countries, a general partnership or simply a partnership, refers to an association of persons or an unincorporated company with the following major features:...
, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs). It is a partnership in which only one partner is required to be a general partner.
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
Joint and several liability
Where two or more persons are liable in respect of the same liability, in most common law legal systems they may either be:* jointly liable, or* severally liable, or* jointly and severally liable.-Joint liability:...
for the debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
s of the partnership.
As in a general partnership, the GPs have actual authority as agents
Agency (law)
The law of agency is an area of commercial law dealing with a contractual or quasi-contractual, or non-contractual set of relationships when a person, called the agent, is authorized to act on behalf of another to create a legal relationship with a third party...
of the firm to bind all the other partners in contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
s 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."
Like shareholder
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
s in a corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
, LPs have limited liability
Limited liability
Limited liability is a concept where by a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability. If a company with limited liability is sued, then the plaintiffs are suing the company, not its...
, 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
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
), the nature and extent of which is usually defined in the partnership agreement. General Partners thus carry more liability, and in cases of financial loss, the GPs will be liable.
Limited partnerships are distinct from limited liability partnership
Limited liability partnership
A limited liability partnership is a partnership in which some or all partners have limited liability. It therefore exhibits elements of partnerships and corporations. In an LLP one partner is not responsible or liable for another partner's misconduct or negligence. This is an important...
s, 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 agencyAgency (law)
The law of agency is an area of commercial law dealing with a contractual or quasi-contractual, or non-contractual set of relationships when a person, called the agent, is authorized to act on behalf of another to create a legal relationship with a third party...
authority to bind the firm unless they are subsequently held out as agents and so create an agency by estoppel
Estoppel
Estoppel in its broadest sense is a legal term referring to a series of legal and equitable doctrines that preclude "a person from denying or asserting anything to the contrary of that which has, in contemplation of law, been established as the truth, either by the acts of judicial or legislative...
or acts of ratification by the firm create ostensible authority.
In some jurisdictions, the limited liability of the LPs is contingent on their not participating in management.
History
The societates publicanorum which arose in RomeRome
Rome is the capital of Italy and the country's largest and most populated city and comune, with over 2.7 million residents in . The city is located in the central-western portion of the Italian Peninsula, on the Tiber River within the Lazio region of Italy.Rome's history spans two and a half...
in the 3rd century BC may have arguably been the earliest form of limited partnership. During the heyday of the Roman Empire
Roman Empire
The Roman Empire was the post-Republican period of the ancient Roman civilization, characterised by an autocratic form of government and large territorial holdings in Europe and around the Mediterranean....
they were roughly equivalent to today's corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
s: some had many investors, and interests were publicly tradable. However, they required at least one (and often several) partners with unlimited liability.
The Qirad
Qirad
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...
and Mudaraba institutions in Islamic law
Sharia
Sharia law, is the moral code and religious law of Islam. Sharia is derived from two primary sources of Islamic law: the precepts set forth in the Quran, and the example set by the Islamic prophet Muhammad in the Sunnah. Fiqh jurisprudence interprets and extends the application of sharia to...
and economic jurisprudence were more similar to the modern limited partnership. These were developed in the medieval Islamic world
Islamic Golden Age
During the Islamic Golden Age philosophers, scientists and engineers of the Islamic world contributed enormously to technology and culture, both by preserving earlier traditions and by adding their own inventions and innovations...
, when Islamic economics
Islamic economics in the world
Islamic economics in practice, or economic policies supported by self-identified Islamic groups, has varied throughout its long history. Traditional Islamic concepts having to do with economics included...
flourished and when early trading companies
Trading company
Trading companies are businesses working with different kinds of products which are sold for consumer, business or government purposes. Trading companies buy a specialized range of products, maintain a stock or a shop, and deliver products to customers....
, big business
Big Business
Big business is a term used to describe large corporations, in either an individual or collective sense. The term first came into use in a symbolic sense subsequent to the American Civil War, particularly after 1880, in connection with the combination movement that began in American business at...
es, contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
s, bills of exchange and long-distance international trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
were established.
In medieval Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
, 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 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. 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.
Colbert's Ordinance of 1673 and the Napoleonic Code
Napoleonic code
The Napoleonic Code — or Code Napoléon — is the French civil code, established under Napoléon I in 1804. The code forbade privileges based on birth, allowed freedom of religion, and specified that government jobs go to the most qualified...
of 1807 reinforced the limited partnership concept in European law. In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, 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.
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 StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, the LP organization is most common among law firms, accounting firms, film production companies
Film industry
The film industry consists of the technological and commercial institutions of filmmaking: i.e. film production companies, film studios, cinematography, film production, screenwriting, pre-production, post production, film festivals, distribution; and actors, film directors and other film crew...
, finance firms 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
Manual labour
Manual labour , manual or manual work is physical work done by people, most especially in contrast to that done by machines, and also to that done by working animals...
-capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
" 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
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
companies almost exclusively use a combination of general and limited partners for their investment funds. Well-known limited partnerships include Enterprise Products
Enterprise Products
Enterprise Products Partners L.P. is a natural gas and crude oil pipeline company with headquarters in Houston, Texas. It acquired GulfTerra in September 2004, and is a member of the Fortune 500...
and Blackstone Group
Blackstone Group
The Blackstone Group L.P. is an American-based alternative asset management and financial services company that specializes in private equity, real estate, and credit and marketable alternative investment strategies, as well as financial advisory services, such as mergers and acquisitions ,...
(both of which are public companies
Public company
This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...
), and Bloomberg L.P.
Bloomberg L.P.
Bloomberg L.P. is an American privately held financial software, media, and data company. Bloomberg makes up one third of the $16 billion global financial data market with estimated revenue of $6.9 billion. Bloomberg L.P...
(a private company).
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
Uniform Limited Partnership Act
The Uniform Limited Partnership Act , which includes its 1976 revision called the Revised Uniform Limited Partnership Act , is a uniform act , proposed by the National Conference of Commissioners on Uniform State Laws for the governance of business partnerships by U.S. States...
also permitted limited partnerships to become Limited Liability Limited Partnership
Limited liability limited partnership
The limited liability limited partnership is a relatively new modification of the limited partnership, a form of business entity recognized under U.S. commercial law. An LLLP is a limited partnership and as such consists of one or more general partners and one or more limited partners...
s. 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.
United Kingdom
In the United KingdomUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
limited partnerships are governed by the Limited Partnerships Act 1907. The UK government department of Business, Enterprise and Regulatory Reform (now the Department for Business Innovation and Skills) consulted in 2008 on proposals to modify and merge the Act with the Partnership Act 1890, but the proposals did not go ahead http://www.bis.gov.uk/files/file51586.pdf, and the 1907 Act remains the governing Act.
English law
English law
English law is the legal system of England and Wales, and is the basis of common law legal systems used in most Commonwealth countries and the United States except Louisiana...
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
Law Commission
A Law Commission or Law Reform Commission is an independent body set up by a government to conduct law reform; that is, to consider the state of laws in a jurisdiction and make recommendations or proposals for legal changes or restructuring...
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.
Japan
Japanese lawJapanese law
-Historical Developments:Pre-Modern History The early law of Japan was heavily influenced by Chinese law. Little is known about Japanese law prior to the seventh century, when the Ritsuryō was developed and codified. Before Chinese characters were transplanted and adopted by the Japanese, the...
has historically provided for two business forms similar to limited partnerships:
- Goshi gaishaGōshi gaishaGo-shi Gaisha is a Japanese concept of a "unlimited liability" company, but the structure is like as the limited partnership. Unlike the other business types there is no limit on what a company is legally responsible for. Consequently, under the Japanese system this also means there is a nominal...
, a form of close corporationCorporationA corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
(mochibun kaishaMochibun kaishaare a class of corporations under Japanese law. While mochibun kaisha have legal personality as corporations, their internal functions are similar to partnerships, as they are both owned and operated by a single group of .-Types:...
) with unlimited liability for certain shareholders - Tokumei kumiaiTokumei kumiai, literally "anonymous partnerships," are a Japanese bilateral contract governed by the Commercial Code of Japan, Article 535 et seq. In English, they are often called TK or silent partnerships...
(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
Diet of Japan
The is Japan's bicameral legislature. It is composed of a lower house, called the House of Representatives, and an upper house, called the House of Councillors. Both houses of the Diet are directly elected under a parallel voting system. In addition to passing laws, the Diet is formally...
passed legislation enabling the formation of . These are very similar to Anglo-American limited partnerships, in that they adopt most provisions of 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
Negative equity
Negative equity occurs when the value of an asset used to secure a loan is less than the outstanding balance on the loan. In the United States, assets with negative equity are often referred to as being "underwater", and loans and borrowers with negative equity are said to be "upside down".People...
(i.e. liabilities exceeding assets); however, profits and losses while the partnership has positive equity are shared equally.
New Zealand
In New ZealandNew Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
, 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
Companies Office
The New Zealand Companies Office is a government agency that provides business registry services in relation to corporate entities, personal property and capital market securities...
. 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.