What is a limited partnership?

Partnerships differ from other business types like sole traders and limited companies and a limited partnership shares only some of the features of a general partnership and a Limited Liability Partnership. A limited partnership, formed under the Limited Partnerships Act 1907, is a business association of one or more ‘general partners’ alongside one or more ‘limited partners’. Limited partnerships are increasingly rare in the UK, with many new such partnerships established essentially for investment purposes.

It is the two classes of partner – general partners and limited partners – that define the limited partnership. They have different roles, responsibilities and liability for the partnership’s debts.

A limited partnership must have at least one ‘general partner’ and also at least one ‘limited partner’. A partner cannot perform both roles. A partner can, however, be an individual or a company, and there are no particular residence or nationality requirements that apply to the partners.

General partners

The general partner or partners manage the business, controlling day to day operations and making the necessary decisions, including any binding decisions. Where the business is set up for certain investment purposes, it is also the general partners who can apply for the partnership to act as an authorised contractual scheme (ACS).

Their control comes at a price, in much the same way as for general partners in an ordinary partnership. It is the general partner who is personally liable for the partnership’s debts and other obligations. Where there is more than one general partner, they are jointly liable for the partnership’s debts. Liability is potentially unlimited, so they may face losing personal assets.

A limited partnership must have at least one general partner, each of whom is entitled to their share of the partnership profits.

Limited partners

When it’s established, limited partners contribute monies to the partnership. Although they maintain a right to a share of its profits, their role is limited in two ways.

First, they do not have control over business decisions. In this way, they can be likened to passive partners in the business, ceding to general partners the active role of management.

In return for surrendering management power, however, a limited partner benefits from ‘limited liability’. Each limited partner’s personal liability is capped to the amount of their investment (and any personal guarantees they have given). While their original investment may be lost in paying off partnership debts, the limited partner’s personal assets cannot be accessed by creditors.

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A limited partner benefits from limited liability only as long as they do not take part in management or control of the partnership. If a limited partner starts to take an active role, they risk their liability becoming unlimited in the same way as a general partner.

A limited partnership must have at least one limited partner, but not all the partners can be limited. That is, there must be at least one person in the partnership who acts as a general partner, both exerting control and exposed to potentially unlimited personal liability.

A limited partner cannot remove their original financial contribution, although in certain circumstances may make a further investment.

How to set up a limited partnership

A limited partnership must be registered with Companies House, and until that happens all the partners – whether general or limited partners – are equally liable for the partnership’s debts or obligations.

To register the business with Companies House, you’ll need to complete form LP5, which can only be completed on paper. You’ll need to include the following information:

  • The unique name by which the business will be known
  • A brief description of the nature of the partnership business
  • The registered address at which the business will be based, which will be used by Companies House, HMRC and other government bodies for correspondence
  • Name and signature of each general partner
  • Name, amount invested and signature of each limited partner

The completed LP5 form should be posted with a cheque payable to Companies House.

The address to which to send the form depends on whether the partnership’s principal place of business, as documented on the form, is in England and Wales, Scotland or Northern Ireland.

The partners should each register for Self Assessment with HMRC. Both individually and collectively as a partnership, it’s generally sensible to take advice about your liability to income tax and National Insurance. Depending on the expected annual turnover of the business, you may also need to register the partnership for VAT.

Aside from tax, there will be other things to consider on setting up the partnership, like what types of insurance the business will need.

Ongoing responsibilities of a limited partnership

Various changes to the limited partnership must be reported to Companies House on form LP6, including:

  • Change in the name of the business
  • Change in the nature of its business activity
  • Change in the registered address at which the partnership is based
  • Change of name by any of the partners
  • New partners joining the partnership
  • When a limited partner becomes a general partner (or vice versa)
  • An additional sum is contributed by a limited partner

The address to send the LP6 form is again based on the partnership’s principal place of business. Again, form LP6 can only be completed on paper, with no electronic option available.

On an annual basis, the partnership must send a partnership tax return to HMRC. In addition, each of the partners needs to account for their own share of the partnership profits, which they do by completing a personal self assessment tax return for the tax year. Again, an accountant can help ensure that the partnership and the individual partners remain on top of their responsibilities.

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