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Getting To Know Limited Partnerships

29 July 2012

Whether you are embarking on a new venture or considering how you structure an existing business, an understanding of what limited partnerships are is essential to informed decision-making. Limited partnerships were introduced to New Zealand in 2008 but you still may not know what they are, or what benefits they have.

A limited partnership is a hybrid of a company and a partnership. It’s a separate legal entity and has full capacity to carry on business. Regulated by the Limited Partnerships Act 2008, much like the Companies Act 1993, it sets out the framework in which a limited partnership may be established, registered, operated and terminated.

A limited partnership comprises at least one general partner and one limited partner. The general partner is responsible for the management of the limited partnership and is liable for the partnership’s debts. The limited partners have no involvement in the management of the limited partnership except in certain limited areas provided by the legislation.

So, why would you use a limited partnership? If you want to limit your liability, protect investor privacy, have flexibility and take advantage of a “flow through” tax status you should consider using a limited partnership. We outline each of these benefits below.

Although the idea for a venture may be attractive, you may not be willing to accept all of the risk associated with it. Limiting your liability to the value of your investment provides some certainty about what you are exposing yourself to when getting involved in a venture.

Some investment opportunities are of a sensitive nature. Where you don’t wish to be publicly identified as providing capital to a particular venture the role of a limited partner may appeal, as details relating to limited partners are not available for public viewing. Similarly, where a party doesn’t want to have the financial statements of a venture they are investing in made public a limited partnership may be attractive.

In the main the limited partnership agreement is a flexible document that can be tailored to suit your particular needs. It’s a private contract between the partnership and partners, and it provides the partners with the ability to contract out of certain fiduciary obligations. Unlike a company constitution the limited partnership agreement is not publicly registered.

Limited partnerships have a “flow through” tax status which allows the losses and gains of a limited partnership to be attributed directly to the partners whose personal tax status will govern how they will be taxed. If you have a special tax status this may be particularly advantageous. In particular, investors such as charitable trusts may wish to pursue ventures with other parties through a limited partnership structure.

In order to enjoy all of these benefits the limited partners must maintain a passive role. It’s important that you have confidence in the management abilities of any general partners so that you aren’t tempted to engage in the management of the business outside of those certain areas provided by the legislation.

Although limited partnerships were originally designed as vehicles for venture capital, other groups have been attracted to their limited liability and flow-through tax benefits. Since they were established four years ago, limited partnerships have been adopted by joint ventures, forestry, dairy farms, and iwi groups, among others. In some situations establishing a limited partnership may not be as simple as a joint venture or company structure but, depending on the nature of the venture, the benefits of the structure are worth it.

 

Dan Moore is a partner of Norris Ward McKinnon. Information in this article should not be a substitute for legal advice. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.