Limited partnership
A limited partnership is a type of partnership with general partners, who have a right to manage the business, and limited partners, who have no right to manage the business but have only limited liability for its debts. Limited partnerships are distinct from limited liability partnerships in which all partners have limited liability.
The general partners 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 for the debts of the partnership.
As in a general partnership, the GPs have actual authority, as agents of the firm, to bind the partnership in contracts 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, limited partners have limited liability. That 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, 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 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, the limited liability of the limited partners is contingent on their not participating in management.
Partnership interests are afforded a significant level of protection through the charging order 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 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 ; or acts of ratification by the firm create ostensible authority.
History
The societates publicanorum, which arose in Rome in the third century BC, may have arguably been the earliest form of limited partnership. During the heyday of the Roman Empire, they were roughly equivalent to today's corporations. Some had many investors, and interests were publicly tradable. However, they required at least one partners with unlimited liability. A very similar form of partnership was present in Arabia at the time of the coming of Islam and this became codified into Islamic law as the qirad.Development in early modern Europe
In medieval Italy, a business organization known as the commenda 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, but 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 and the Napoleonic Code reinforced the limited partnership concept under European law. In the United States, 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 is the Danish equivalent of the limited partnership. The owners are divided into general partners and limited partners. 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 designation standing for 'partnership limited by shares', a form of corporate organization roughly equivalent to a master limited partnership. A Kommanditgesellschaft auf Aktien has two types of participators. It has at least one partner with unlimited liability. It is in that sense a private company. Komplementärs are natural persons or legal persons. If the Komplementär is a corporation with limited liability then the type of the company has to be named as UG & 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 is the stock of the company and divided into shares. A KGaA is in that aspect comparable with a German Aktiengesellschaft.
The investment of all partners is the corporate's total capital. The KGaA is a traditional type of very large family businesses 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. Also the German football club Borussia Dortmund uses this corporate organization for its professional football team as part of its compliance with the "50+1 rule".
Hong Kong
offers two forms of limited partnerships, namely limited partnerships governed by the and limited partnership funds, known as "LPFs", governed by the . 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
has historically provided for two business forms similar to limited partnerships:- Goshi gaisha, a form of close corporation with unlimited liability for certain shareholders
- Tokumei kumiai, a form of partnership in which non-operating partners have limited liability so long as they remain anonymous
New Zealand
In New Zealand, Limited Partnerships are a form of partnership involving General Partners, and Limited Partners. 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
- an indefinite lifespan if desired
- separate legal personality
- tax treatment for Limited Partnerships.