What is a Limited Partnership?
Just what is a Limited Partnership, and why is it different from a standard Partnership?
Limited Partnerships were intended to appeal primarily to foreign investors and venture capital investors in New Zealand start-up enterprises. This is because they offer limited liability to investors and allow any losses to flow through to their personal tax returns, a little bit like a Look Through Company does for residential property investors.
The are separate legal entities, or persons, under the law so they operate a little more like a company than a partnership. Some partners in a Limited Partnership enjoy limited liability. A standard partnership is a much looser arrangement which enjoys no limited liability.
Two Types of Partners
Limited Partnerships have two types of partners – a General Partner and a Limited Partner. It’s important to note that you can be one or the other, not both.
Every Limited Partnership must have at least one General Partner who is responsible for managing the business. A General Partner can bind the partnership by contract. They are also liable for any debts and commercial obligations that the Partnership incurs. The law refers to this as being ‘jointly and severally liable’ for the debts of the Partnership along with any other General Partner. General Partners can make capital contributions to the Partnership, but they are not obliged to. At least one of the General Partners must fit the criteria of being resident in New Zealand.
It is also possible for a General Partner to incorporate, or form a company, which would have the effect of limiting their liability. At least one of the General Partners must be a natural person who lives in New Zealand. In the case of companies, one or more of the Directors should reside in New Zealand. The exception here is if a person lives in a prescribed country. At the moment, Australia is the only country which meets the prescribed country criteria, but this is subject to change.
The other point of note is that General Partners cannot be disqualified. This means that in effect that they cannot be a person who has been prohibited to act as a director or promoter under New Zealand or foreign legislation.
Any General Partnership is governed by the Companies Act 1908. You should be aware that the Government has announced that they will introduce legislation shortly to update this Act. You can access the draft bill here.
There must be at least one Limited Partner. Limited Partners are only liable for debts to the extent of their capital contribution so in that regard they are very much like shareholders in a limited liability company.
Their role is passive, which means they take no part in the management of the Partnership. They are protected in the legislation if they take a role in making strategic decisions but day-to-day operational management is prohibited. So they may be a very attractive vehicle for an investor that wishes to contribute capital but doesn’t have the time or inclination to be closely involved in the business.
It is still possible for a Limited Partner to undertake work for the Limited Partnership but it is very important that the nature of this work is not related to management. We would advise clients to seek legal advice if this is likely.
Limited Partnership Agreements are required
Unlike a standard Partnership, Limited Partnerships must have an agreement that sets out how the Partnership will be governed and managed. We strongly advise seeking legal advice on the contents of this document.
How are they formed?
Limited Partnerships are registered and administered by the Companies Office.
Once registered, a Limited Partnership will have the abbreviation ‘LP’ after their name in much the same way as a limited liability company will have the letters ‘Ltd.’.
Unlike standard Partnerships, a Limited Partnership will survive one of the Partners exiting the business. The Limited Partnership won’t dissolve if this event takes place.
The exit of a Partner, limited or general, will be governed by the Partnership Agreement.
The names of Limited Partners are not publicly accessible on the Companies Office site.
We should note that Limited Partnerships may have a much higher compliance cost associated with them when compared with Partnerships or Companies but these costs should not outweigh the benefits of the structure.
How are Limited Partnerships Taxed?
Limited Partnerships are very similar to standard Partnerships in one regard. Any profits or losses ‘flow through’ to the Partners based on their share of the economic interest in the Limited Partnership.
A capital intensive start-up that may take a few years to reach profitability will be able to have tax losses ‘flow through’ to the partners.
In the case of a profit, similar rules exist for ‘distributions’ to those that apply with company dividends. The Limited Partnership must be solvent when a distribution is made.
There are a number of other advantages. There are no issues with an overdrawn shareholders current account as there may be in a company structure. Additionally, there are no complications around liquidation and accessing any subsequent capital gains.
Associated Persons rules apply to Limited Partnerships where a Partner holds more than 25% so you should be aware of this if entering into this sort of structure. As such, foreign Limited Partners will not incur any New Zealand income tax on any profit sourced from a New Zealand Limited Partnership. Tax residents of New Zealand will.
Please note that the advice given here is general in application and provided for reference purposes only. Readers should not rely on it in the absence of specific legal or accounting advice. You should always consult a professional advisor. Generate Accounting has helped a number of people form Limited Partnerships and we would welcome the opportunity to chat through this with you in more detail.