A limited partnership is a type of legal entity in which there are at least two partners, one of whom has limited liability, and one of whom does not. The number of partners can be greater than two, but nevertheless each is either a general partner (unlimited liability) or a limited or
silent partner (limited liability). It is important to note that for a partnership to be considered
limited, there must be both general and silent partners.
As the name suggests, a limited partnership is a type of partnership, which means that there are at least two parties (partners) who agree to co-operate and share liability and income in pursuit of a common goal. While some aspects of the arrangement are dependent on the type of partnership (e.g. liability in the case of a limited partnership), the actual scope of co-operation, the extent of liability and the distribution of income can be established in a partnership contract in accordance with the partners’ wishes.
Owners of a limited partnership
By definition, the owners of a limited partnership are divided into two categories: general partners and silent or limited partners. Each party must be represented by at least one partner. The difference between the parties lies in the extent of their involvement in managing, taking liability for and sharing the company’s profits.
General partners in a limited partnership are those who bear unlimited liability for the company’s obligations. They have the right to participate in the management of the company, to vote on decisions and to determine the overall course of business development. General partners are usually also the ones who represent the company in dealings with third parties, as only they can enter into contracts with third parties on behalf of the partnership.
Limited or silent partners in a limited partnership are those whose liability for the company’s obligations is limited to the extent of their contributions. In other words, their liability does not extend beyond the amount they have invested in the company. This means that limited partners are better protected in the event of poor business planning and failures, but their influence within the partnership is limited as well. Limited partners cannot participate in the management of the company, i.e. they can invest, but they cannot control day-to-day operations or how their investments are managed.
Functions of a limited partnership
The main function of a limited partnership is to boost the partners’ chances of increasing their individual profits and security in comparison to what they would gain if they operated individually. Entering a partnership agreement may also allow the partners to compensate for the weaknesses, and utilise the strengths, of each individual: one of the partners may bring significant financial assets, another may be able to offer well-developed manufacturing facilities, while another may have a wide network of clients, etc.
Other than that, limited partnerships have no special functions and are mainly distinguished from other legal business structures by the way the roles are distributed between partners. A limited partnership can engage in any type of business activity, including trade, services, manufacturing, etc.
Advantages of a limited partnership
There are two main advantages of a limited partnership:
- Asset protection
In a limited partnership, partners co-operate to achieve more than they would individually, compensating for their weaknesses and combining their strengths. A limited partnership can generate more capital investment by bringing in new limited partners, greatly expanding the company’s financial options.
Another important aspect is the protection of assets for limited partners. As their liability is limited to the value of their contributions, potential silent partners may consider it advantageous to join a limited partnership; because they can freely control their contributions, a partnership enables them to make a profit without taking major financial risks.
General vs limited partnerships
The main difference between a general and a limited partnership is the distribution of liability. In a general partnership, all of the liability is distributed equally between all partners, and that liability is unlimited, regardless of their contributions. By default, all rights over the income and management of the company are also shared equally, but this can be changed by amending the provisions of the partnership agreement. In a limited partnership, the extent of liability is different for general and limited partners. General partners have unlimited liability, meaning that their personal assets can be seized to cover the company’s debts, whereas a limited partner is liable only to the total value of their contributions.
Best jurisdictions for limited partnerships
Although in most countries the options for limited partnerships are more or less the same, there are a number of jurisdictions that are especially accommodating to this type of business and which may prove especially advantageous. These are:
Japan has its own legal traditions concerning partnerships where some partners have limited liability. Whereas in most Western countries there is usually only one option for incorporating a limited partnership, Japan offers three company types that functionally resemble a limited partnership, offering a variety of choices.
Limited partnership for investment
When the partnership has negative equity, general partners have full liability and the right to receive all profits, but when the company has positive equity, liability is limited in accordance with the investment made by each partner, and profits are distributed likewise.
The liability of any partner who remains anonymous is limited to the value of their investment, but partners may choose at any time to disclose their names, at which point their liability becomes unlimited.
Joint venture partnership
The most similar structure to the Western limited partnership, with the only difference being that in certain cases limited partners can still be sued individually, as if they had full liability.
The USA can be a beneficial jurisdiction for limited partnerships because different states apply different laws for such entities and so businesses are able to choose the state with the most favourable legislation for entering into a partnership contract. This is complemented by the fact that, in many cases, states can choose whether or not to adopt certain federally-proposed laws. For example, some states allow limited partners to increase their management responsibilities despite their limited liability, while other states also permit limited partnerships to become limited liability limited partnerships, which is a separate kind of business entity.
The United Kingdom
While limited partnerships in the United Kingdom generally follow the same principles as anywhere else in the Western world, this jurisdiction also allows for some variations due to its political traditions. For example, there are differences between English/Welsh and Scots law, and limited partnerships may choose the location most favourable to them while still being registered in the same country.
To get more information on partnerships and their various types, contact our lawyers now for free advice on how to start the incorporation process.