What is a limited part­ner­ship?

If two (or more) people want to set up their own business and open a company together, the first thing they need to agree on is what legal form to choose. Since a limited part­ner­ship is usually easier to set up than a cor­por­a­tion, the part­ner­ship is usually the preferred choice, since it doesn’t require a minimum capital con­tri­bu­tion or any fixed capital holdings.

However, as they say, there is no such thing as the perfect legal structure. Each one has its own ad­vant­ages and dis­ad­vant­ages. So what makes the limited part­ner­ship stand out, and what do you need to know about it? What are its ad­vant­ages and dis­ad­vant­ages? Here, we will outline the answers for you.

The limited partner con­trib­utes a certain amount of money, known as a limited partner con­tri­bu­tion, from their own funds when the company is founded. The amount of this con­tri­bu­tion is not regulated by law and can be de­term­ined in­di­vidu­ally, in con­sulta­tion with the other partners. In the event of in­solv­ency, the limited partner is only liable to the extent of the con­tri­bu­tion they made, so their private assets remain untouched. This means that the limited partner is legally limited in their liability. The pre­requis­ite for this, however, is that the con­tri­bu­tion (which can consist of both money and material assets) has already been made in full by this time.

This is the dif­fer­ence between how a limited part­ner­ship functions, versus a general part­ner­ship in which the partners are per­son­ally liable to the creditors for the company’s li­ab­il­it­ies as joint debtors. For more in­form­a­tion on legal defin­i­tions of limited part­ner­ships, please visit the le­gis­la­tion.gov.uk website.

Aside from a limited partner, a limited part­ner­ship must also have a general partner within the company. They are, however, fully liable to creditors i.e. with the entire assets of the company and, in an emergency, their private assets. Both a natural person and a legal entity can enter a limited part­ner­ship as a general partner – for example, a limited liability company (LLC) so that the original limited part­ner­ship becomes an LLC & Co.

Sub­sequently, general partners bear a much higher risk when setting up a limited part­ner­ship, but in return they have the right to manage the company on their own – in other words, they represent the company in­tern­ally and ex­tern­ally. A limited partner is typically excluded from managing the company, but can be granted a power of attorney or pro­cur­a­tion. These must be recorded as a deviation in the articles of as­so­ci­ation.

Just like any other legal form, the limited part­ner­ship also has special ad­vant­ages and dis­ad­vant­ages which you need to take into account when picking a legal structure for your company.

A limited part­ner­ship offers share­hold­ers numerous ad­vant­ages and is par­tic­u­larly suitable for a family business. However, anyone wishing to become a general partner in a limited part­ner­ship should be aware of their re­spons­ib­il­it­ies and consider the decision carefully. The following example il­lus­trates the con­sequences of an ill-con­sidered decision:

Jenny Smith has always dreamed of being her own boss. After careful con­sid­er­a­tion, she decides to go into business for herself by selling in­nov­at­ive office furniture. Tables that can be folded out and adjusted in height, office chairs with in­teg­rated massage functions, and lamps that adjust their light intensity according to natural light present – these are her planned best­sellers.

Her sister Annie and brother Alex are en­thu­si­ast­ic about the business idea and want to be part of it, con­trib­ut­ing a con­sid­er­able amount of money. Since Alex’s former classmate founded a limited part­ner­ship several years ago, Alex knows about the ad­vant­ages of this legal structure and is able to convince Jenny to start a limited part­ner­ship. For Jenny Smith, it was clear from the outset that she wanted to run the company, so, as a general partner, she con­trib­uted around £30,000 to the “Smart Office” company. Her siblings Annie and Alex each have a role as limited partners, con­trib­ut­ing £10,000, which they register as a liability sum.

Business has been good for about a year, and all the share­hold­ers are satisfied with their profits and re­spons­ib­il­it­ies. However, in their third financial year, numerous com­pet­it­ors appear in the market, offering sig­ni­fic­antly lower prices and con­sist­ent quality. “Smart Office” becomes insolvent and must pay debts to the value of £100,000. However, in addition to the existing limited part­ner­ship capital (£30,000 from Jenny Smith and £10,000 from each of her siblings) is not enough.

Annie and Alex each lose £10,000, thus ful­filling their ob­lig­a­tion as limited partners of the limited part­ner­ship – their private assets remain untouched. However, Jenny Smith is a general partner and must pay the remaining £50,000 herself. It doesn’t matter whether or not she has suf­fi­cient financial means. Her car, house, apartment (i.e. her property) must also be used for repayment.

It would be useless to dissolve the limited part­ner­ship in this instance, since after the dis­sol­u­tion Jenny Smith still has to settle the debts using her personal assets. Anyone who wants to start a limited part­ner­ship with a general partner role should be aware of this risk and re­spons­ib­il­ity. Jenny Smith could have reduced her liability risk if she had started a limited liability cor­por­a­tion as a general partner. You can read more about this in our article on founding a limited part­ner­ship: liability, costs, and more.

Please note the legal dis­claim­er relating to this article.