A limited partnership is a type of business structure that consists of limited and general partners. The main advantage of a limited partnership is the limited liability that investors face. However, there is more to it than that, and it’s worth taking a closer look at what a limited partnership is.
One of the first decisions you’re faced with when going into business is the type of legal structure you will use. In the UK, you might choose to register as a sole trader, partnership, or limited company, depending on your particular situation. In this post, we take a closer look at limited partnerships in particular.
Before setting up any business structure, it’s important to get tax and legal advice relevant to your specific needs and the circumstances of your business. So, while this article aims to inform you about the basics of a limited partnership, it definitely doesn’t constitute legal advice! If you want to learn more about limited partnerships and other business structures, head over to the Gov.uk website.
Limited Partnership Meaning
In the UK, there are three types of partnership – general, limited, and limited liability. As the name implies, one of the main benefits of a limited partnership is that it limits the liability of investors (in this case they are the limited partners).
A limited partnership is made up of at least one “general partner” and at least one “limited partner”. Both general and limited partners can be a natural person (i.e., an individual) or a legal person (e.g., a company). A person cannot be both a general and limited partner at the same time.
It’s important not to confuse limited partnerships with limited liability partnerships, or LLPs, which do not have general partners. You can find out more about them by clicking here.
General Partner vs Limited Partner
General partners are fully and personally liable for the debts and obligations of the partnership. This means their liability extends to their private assets in certain circumstances. Multiple general partners are jointly liable for the debts and obligations of the partnership. In other words, it’s not just the investments they make that are liable to pay off the debts of the partnership.
The trade-off for this higher level of risk is the right to manage and represent the partnership externally. General partners handle the day-to-day activities and make decisions on behalf of the partnership.
In contrast, limited partners are passive investors and can’t become involved in the management of the partnership. They contribute capital and are only liable for the debts and obligations of the partnership up to the amount of their contribution. Unlike for general partners, this means that their private assets are protected in the event of bankruptcy, as long as their agreed contribution has been made in full.
The amount of the contribution is decided by the partners. Unlike a limited company, there is no minimum capital required to register a limited partnership.
While limited partners can increase their contribution, they cannot withdraw their original contribution during the life of the partnership. If a limited partner participates in the management or decision-making of the partnership, they are treated as a general partner while doing so, attracting the same level of personal liability.
So, there are clearly some noteworthy advantages and disadvantages of limited partnerships, and we’ve summed up the main ones below.
Limited Partnership Advantages and Disadvantages
Limited Partnership Advantages
- Investors face limited liability – they’re only liable for what they invest and not their personal assets
- Limited partnerships are also generally less complex to set up and run than company structures
- As limited partnerships are not corporations, they don’t pay corporation tax – the partnership’s profits are shared between the partners who are then individually taxed on their income
- Like a general partnership, a limited partnership is not a legal person so it cannot contract, sue or be sued, or own property – both an advantage and a disadvantage depending on which way you look at it
Limited Partnership Disadvantages
- There is a lot of documentation to go through – some permits and licenses are also costly to obtain
- The partnership is terminated when someone dies or withdraws from it
- General partners are still exposed to liability on their personal assets, while limited partners have no power when it comes to making decisions
- Limited partnerships can generally have up to a maximum of 20 partners, with some exceptions – this might not always be a disadvantage if you don’t need more partners
For these reasons, limited partnerships are often used to structure investment and wealth management activities. But let’s look at another limited partnership example in more detail.
Limited Partnership Example
A simple example of a limited partnership would be if you wanted to start a café but needed some external investment. You’re happy to run the day-to-day operations of the café, and don’t really want anyone else to have a say in what goes on. You bring on an outside investor as a limited partner, while in this case you are the general partner.
The idea is that you benefit from the partnership by being able to set up the café, therefore allowing you to earn money from it while still having full control over the business operations. The limited partner gains passively from their investment, and this could be through dividend payments you make directly to them. However, they would have no say in the running of your café.
The advantage for the investor is that if your café was to start making losses – or eventually go bankrupt – they would only lose their initial investment. All of the debt incurred by the business, be this money owed to suppliers or rent owed on the property, is your responsibility as the general partner.
Registering a Limited Partnership
Setting up a limited partnership in the UK is a fairly straightforward process. You must register it with Companies House by completing a registration form (LP5) containing:
- The name of the partnership
- The general nature of its business
- The UK address of the principal place of business
- The full name and signature of every partner
- A statement that the partnership is limited
- A description of each limited partner, as well as the amount and form of their contribution
There is a £20 registration fee (£100 for same-day registration). You must communicate any changes to the above details to Companies House within seven days.
Hopefully you now understand what a limited partnership is! If you want to learn about being a sole trader instead, check out our article on that here. Or, check out the rest of our articles all about starting and running a business here.