A limited partnership (LP) is a form of
partnership
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 ...
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. Limited partnerships are distinct from
limited liability partnership
A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore can exhibit elements of partnerships and corporations. In an LLP, each partner is not ...
s, in which all partners have limited liability.
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
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
If parties have joint liabili ...
for the
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
s of the partnership.
As in a general partnership, the GPs have actual authority, as
agents of the firm, to bind the partnership in
contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...
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."
Background of limited liability
Like
shareholders in a
corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and ...
, limited partners have
limited liability
Limited liability is a legal status in which a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a corporation, company or partnership. If a company that provides limited liability to it ...
. 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
A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...
), 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. 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 A charging order, in English law, is an order obtained from a court or judge by a judgment creditor, by which the property of the judgment debtor in any stocks or funds or shares in a limited liability company or land stands charged with the pay ...
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.
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
State may refer to:
Arts, entertainment, and media Literature
* ''State Magazine'', a monthly magazine published by the U.S. Department of State
* ''The State'' (newspaper), a daily newspaper in Columbia, South Carolina, United States
* ''Our S ...
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
, established_title = Founded
, established_date = 753 BC
, founder = King Romulus (legendary)
, image_map = Map of comune of Rome (metropolitan city of Capital Rome, region Lazio, Italy).svg
, map_caption ...
in the third century BC, may have arguably been the earliest form of limited partnership. During the heyday of the
Roman Empire
The Roman Empire ( la, Imperium Romanum ; grc-gre, Βασιλεία τῶν Ῥωμαίων, Basileía tôn Rhōmaíōn) was the post- Republican period of ancient Rome. As a polity, it included large territorial holdings around the Mediter ...
, they were roughly equivalent to today's
corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and ...
s. Some had many investors, and interests were publicly tradable. However, they required at least one (and often several) partners with unlimited liability.
[Malmendier, Ulrike; ''Societas publicanorum: staatliche Wirtschaftsaktivitäten in den Händen privater Unternehmer ''; Böhlau Verlag; Cologne, FRG; 2002] 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
Italy ( it, Italia ), officially the Italian Republic, ) or the Republic of Italy, is a country in Southern Europe. It is located in the middle of the Mediterranean Sea, and its territory largely coincides with the homonymous geographical ...
, a business organization known as the ''
commenda The commenda was a medieval contract which developed in Italy around the 10th century, and was an early form of limited partnership. The commenda was an agreement between an investing partner and a traveling partner to conduct a commercial enterpris ...
'' 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. 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. 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. Moreover, Mongol elites formed trade partnerships with merchants from Italian cities, including
Marco Polo’s family.
Colbert's Ordinance (1673) and the
Napoleonic Code (1807) reinforced the limited partnership concept under European law. In the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
, 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.
Worldwide
Denmark
A
kommanditselskab
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 p ...
(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
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
designation standing for 'partnership limited by shares', a form of corporate organization roughly equivalent to a
master limited partnership
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.
To ...
. A
Kommanditgesellschaft
A (abbreviated "KG", ; from + ) 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 derive ...
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 person
In jurisprudence, a natural person (also physical person in some Commonwealth countries, or natural entity) is a person (in legal meaning, i.e., one who has its own legal personality) that is an individual human being, distinguished from the br ...
s or
legal person
In law, a legal person is any person or 'thing' (less ambiguously, any legal entity) that can do the things a human person is usually able to do in law – such as enter into contracts, sue and be sued, own property, and so on. The reason for ...
s. 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''. 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
Limited liability is a legal status in which a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a corporation, company or partnership. If a company that provides limited liability to it ...
(Kommanditisten) is the stock of the company (Grundkapital) and divided into shares. A KGaA is in that aspect comparable with a German
Aktiengesellschaft
(; abbreviated AG, ) is a German word for a corporation limited by share ownership (i.e. one which is owned by its shareholders) whose shares may be traded on a stock market. The term is used in Germany, Austria, Switzerland (where it is equi ...
.
The investment of all partners is the corporate's total capital (Gesamtkapital). The KGaA is a traditional type of very large
family business
A family business is a commercial organization in which decision-making is influenced by multiple generations of a family, related by blood or marriage or adoption, who has both the ability to influence the vision of the business and the willingn ...
es (that are partly publicly traded) in Germany; the consumer products giant
Henkel, pharmaceutical company
Merck and media conglomerate
Bertelsmann are prominent examples. 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
Ballspielverein Borussia 09 e. V. Dortmund, commonly known as Borussia Dortmund (), BVB (), or simply Dortmund (), is a German professional sports club based in Dortmund, North Rhine-Westphalia. It is best known for its men's professional fo ...
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
5 (five) is a number, numeral and digit. It is the natural number, and cardinal number, following 4 and preceding 6, and is a prime number. It has attained significance throughout history in part because typical humans have five digits on eac ...
".
Hong Kong
Hong Kong
Hong Kong ( (US) or (UK); , ), officially the Hong Kong Special Administrative Region of the People's Republic of China (abbr. Hong Kong SAR or HKSAR), is a city and special administrative region of China on the eastern Pearl River Delta i ...
offers two forms of limited partnerships, namely limited partnerships governed by th
Limited Partnership Ordinanceand limited partnership funds, known as "LPFs", governed by th
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.
LPFs were introduced in 2020 and are intended to provide a domestic Hong Kong vehicle for private equity funds.
Japan
Japanese law
The law of Japan refers to legal system in Japan, which is primarily based on legal codes and statutes, with precedents also playing an important role. Japan has a civil law legal system with six legal codes, which were greatly influenced by Ger ...
has historically provided for two business forms similar to limited partnerships:
* ''
Goshi gaisha
Goshi may refer to:
People
* Eiko Goshi (born 1954), Japanese swimmer
* Goshi Hosono (born 1971), Japanese politician
*Goshi Okubo (born 1986), Japanese footballer
* Hirokazu Goshi (born 1966), Japanese footballer
* Ryūden Gōshi (born 1990), Jap ...
'', a form of close
corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and ...
(''
mochibun kaisha are 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
There are three t ...
'') with unlimited liability for certain shareholders
* ''
Tokumei 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. In many respects they are similar to common law ...
'' (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 passed legislation enabling the formation of . 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
Negative equity is a deficit of owner's equity, occurring 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 (particularly real estate, whose loans are mortgages) with ne ...
(i.e. liabilities exceeding assets); however, profits and losses while the partnership has positive equity are shared equally.
New Zealand
In
New Zealand
New Zealand ( mi, Aotearoa ) is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and over 700 smaller islands. It is the sixth-largest island count ...
, 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:
* 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. Registration, maintenance and annual return filing for Limited Partnerships and Overseas Limited Partnerships are conducted through manual forms.
United Kingdom
In the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the European mainland, continental mainland. It comprises England, Scotlan ...
, 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 Partnership Act 1890 (c. 39) is an Act of the Parliament of the United Kingdom which governs the rights and duties of people or corporate entities conducting business in partnership. A partnership is defined in the act as 'the relation which ...
. The UK Department for Business, Enterprise and Regulatory Reform (now the
Department for Business, Energy, and Industrial Strategy (BEIS)) consulted in 2008 on proposals to modify and merge the two Acts, 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.
However, lawsuits may still be filed against the partners by name,
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
A law commission, law reform commission, or law revision 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 chang ...
report on partnership la
LC283suggested 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.
United States
In the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
, 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
Labour or labor may refer to:
* Childbirth, the delivery of a baby
* Labour (human activity), or work
** Manual labour, physical work
** Wage labour, a socioeconomic relationship between a worker and an employer
** Organized labour and the la ...
-
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
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a t ...
companies almost exclusively use a combination of general and limited partners for their investment funds. Well-known limited partnerships include
Enterprise Products
Enterprise Products Partners L.P. () is an American midstream natural gas and crude oil pipeline company with headquarters in Houston, Texas.
It acquired GulfTerra in September 2004. The company ranked No. 105 in the 2018 Fortune 500 list of ...
and
Blackstone Group
Blackstone Inc. is an American alternative investment management company based in New York City. Blackstone's private equity business has been one of the largest investors in leveraged buyouts in the last three decades, while its real estate bu ...
(both of which are
public companies
A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (list ...
), and
Bloomberg L.P.
Bloomberg L.P. is a privately held financial, software, data, and media company headquartered in Midtown Manhattan, New York City. It was co-founded by Michael Bloomberg in 1981, with Thomas Secunda, Duncan MacMillan, Charles Zegar, and a 1 ...
(a
private company
A privately held company (or simply a private company) is a company whose shares and related rights or obligations are not offered for public subscription or publicly negotiated in the respective listed markets, but rather the company's stock is ...
).
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 partnership
The limited liability limited partnership (LLLP) is a relatively new modification of the limited partnership. The LLLP form of business entity is recognized under United States commercial law. An LLLP is a limited partnership, and it consists of ...
s 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.
[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).]
See also
*
Master limited partnership
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.
To ...
References
{{DEFAULTSORT:Limited Partnership
Business law
Types of business entity
Legal entities
Partnerships