Es­tab­lish­ing a limited part­ner­ship: liability, costs, and more

Par­tic­u­larly when it comes to operating a trading company, there are many benefits to forming a limited part­ner­ship. With this legal form, capital providers can be in­teg­rated into a project as limited partners without par­ti­cip­at­ing directly in the business. They normally do not have a voice (unless there are cor­res­pond­ing reg­u­la­tions in the articles of as­so­ci­ation), so that general partners can focus on running the business un­dis­turbed. So, how do you set up a limited part­ner­ship? What should share­hold­ers bear in mind in terms of tasks, costs, and liability?

The legal structure of a limited part­ner­ship is outlined in the Limited Part­ner­ships Act of 1907. Limited part­ner­ships are comprised of limited (silent) partners and general partners. Limited partners are only re­spons­ible for con­trib­ut­ing capital towards the en­ter­prise and are only liable for debts up to that amount. On the other hand, general partners are liable with their entire assets, but are fully re­spons­ible for running the company. In this regard, a limited part­ner­ship can be seen as a hybrid between a part­ner­ship and cor­por­a­tion.

This means that the formation of a limited part­ner­ship requires at least two partners – one limited partner and one general partner. These can be natural or legal persons, as well as other part­ner­ships. There is no upper limit to the number of share­hold­ers.

One of the ad­vant­ages of a limited part­ner­ship is that there are only a few re­quire­ments for its formation. For example, there is no minimum capital re­quire­ment – neither for the formation itself, nor for the in­di­vidu­al share­hold­ers. In principle, there is also freedom to choose the company name. Personal names can be used, as well as factual or fantasy names. A com­bin­a­tion of these com­pon­ents is permitted. Make sure, however, that your company also appears in business op­er­a­tions under the name re­gistered when the limited part­ner­ship was founded.

Once you have found a suitable name for your limited part­ner­ship, and the roles of limited partners and general partners have been dis­trib­uted, you are ready to start setting it up. The first step is to draw up a part­ner­ship agreement, which describes in detail the struc­tures and powers, rights and ob­lig­a­tions of the share­hold­ers involved. Once the contract has been finalised, you can then go register your business with your Companies House. Once you have received your founding documents from Companies House, you can register with Her Majesty’s Revenue & Customs (HMRC) and receive a Cor­por­a­tion Tax Number (CTN) or an Employer Iden­ti­fic­a­tion Number (EIN). This will allow you to begin financial op­er­a­tions.

The basic com­pon­ents of rights, ob­lig­a­tions, and areas of re­spons­ib­il­ity in a limited part­ner­ship are regulated in your national part­ner­ship le­gis­la­tion. The part­ner­ship agreement is the decisive means for de­term­in­ing all areas in which your limited part­ner­ship may choose to deviate from the legal basis. Before drawing up the contract, you and your partners should first ask yourself the following questions:

• Is a limited part­ner­ship the right legal form for your planned business?
• What exactly is the purpose of the company?
• Which business goals do you want to pursue?
• Where should the company’s re­gistered office be?
• How much start-up capital do you need?

Once these basic re­quire­ments have been clarified, you can draw up a memor­andum and articles of as­so­ci­ation, which are not bound by any formal re­quire­ments. However, it is always advisable to include a written contract. The contract should at least define the common business purpose, the company name and re­gistered office, the names of general and limited partners, as well as the amount of their re­spect­ive capital con­tri­bu­tions. Further points you should include are:

• Reg­u­la­tions on man­age­ment and voting rights
• Powers of rep­res­ent­a­tion
• Reg­u­la­tions in the event of with­draw­al and ter­min­a­tion of share­hold­ers
• De­term­in­a­tion of with­draw­al rights
• Profit and loss par­ti­cip­a­tion
• Con­cili­ation clause (mediation in case of dis­agree­ment)

The articles of as­so­ci­ation must be signed by all share­hold­ers.

Those who wish to form a limited part­ner­ship are obliged to register their business with Companies House. Forms and re­quire­ments for the re­gis­tra­tion process can be found on their website.

The re­gis­tra­tion form must include the limited part­ner­ship’s name (which must end in “Limited Part­ner­ship” or “LP”), the type of business being un­der­taken, an address for the company’s office, their legal agent, the name and address of each general partner as well as the terms of their in­volve­ment in the company and the sum con­trib­uted, and the sig­na­tures of all partners. Re­gis­tra­tion with Companies House costs £10 using software or £40 using paper. Same day in­cor­por­a­tion costs £30 and £100, re­spect­ively.

If you set up a limited part­ner­ship, you need to register with HMRC to receive your Cor­por­a­tion Tax Number (CTN)) or an Employer Iden­ti­fic­a­tion Number (EIN). Limited part­ner­ships are required to register for Self-As­sess­ment income returns, both for the company and for the in­di­vidu­al partners. More in­form­a­tion on re­gis­tra­tion is available on the gov.uk website.

After you have suc­cess­fully formed your limited part­ner­ship and re­gistered it with all the relevant au­thor­it­ies, you can now of­fi­cially begin business op­er­a­tions! Limited partners are excluded from this by default. They only have a say in trans­ac­tions and decisions that go beyond the actual purpose of the company. Their par­ti­cip­a­tion in the limited part­ner­ship only goes as far as what is con­trac­tu­ally agreed upon – usually as financial investors. Limited partners are liable for debts incurred to the value of their capital con­tri­bu­tions. General partners are liable with the full extent of their assets.

Please note the legal dis­claim­er relating to this article.