What is a limited partner? An overview of the rights and obligations

For many entrepreneurs, a partnership can be an attractive way to bring a business idea to life. Unlike corporations, limited partnerships typically have fewer formal requirements and no mandatory minimum capital contributions. On the other hand, general partners face unlimited liability for the company’s debts. This article goes into more detail on the subject.

What is a limited partner?

A limited partnership (LP) is a business structure that consists of two types of partners:

• General Partner (GP) – Responsible for managing the business and personally liable for all debts and obligations.
• Limited Partner (LP) – Contributes capital but has no management authority and limited liability, meaning they are only at risk for the amount they invest.

A limited partner’s liability

A UK limited partnership (LP) legally exists only once registered with Companies House and begins trading. If trading starts before registration, the partnership may be treated as a general partnership, making all partners—including intended limited partners—personally liable.

Limited partners’ liability is capped at their agreed capital contribution, as recorded in the LP register. However, if their actual contribution differs from what’s stated in the partnership agreement, disputes may arise—especially in insolvency—potentially exposing them to further liability.

Limited partners must not take part in management. If a limited partner engages in management activities, they risk losing their limited liability and being treated as a general partner.

Joining and leaving a limited partnership

A new limited partner in a limited partnership is generally not liable for debts incurred before they joined unless explicitly agreed in the partnership agreement. Their liability is typically limited to their capital contribution. If they make a capital contribution before their name is registered at Companies House, there could be legal uncertainty. However, in practice, they are usually not formally recognised until their name appears in the register.

When leaving a limited partnership, a formal withdrawal agreement should be drafted and filed to ensure the departing partner’s name is removed from the register and all official documents. If their name remains in records or agreements, they could still be held liable for ongoing debts. Consulting a legal professional can help ensure a smooth and secure exit.

Withdrawing from a limited partnership

A limited partner may withdraw voluntarily if permitted by the partnership agreement or by agreement with the general partners. They may need to sell or transfer their interest, as they cannot unilaterally demand repayment of their capital unless explicitly allowed in the agreement.

A formal withdrawal agreement should be drafted and filed to ensure the departing partner’s name is removed from Companies House records. Failure to do so may result in ongoing liability.

Removal of a limited partner

A limited partner may be removed under terms set out in the partnership agreement. Some agreements require a valid reason for termination, such as misconduct, failure to meet capital commitments, or insolvency, while others allow removal under specific conditions agreed in advance.

What rights does a limited partner have?

Limited partners have a passive role in the business, meaning they cannot manage day-to-day operations or make strategic decisions. Their voting rights are typically limited, except where the partnership agreement grants them specific powers.

They have the right to financial transparency, including access to financial statements and key business information, but do not have direct control over company records or operations. If a limited partner takes on managerial responsibilities, they risk losing their limited liability and being treated as a general partner, making them personally liable for debts.

What are the duties of a limited partner?

A limited partner’s primary duty is to contribute capital to the business while refraining from management involvement. Their contribution may be in the form of cash or assets, but not services, as limited partners cannot contribute labour in exchange for partnership status.

Unlike general partners, limited partners do not owe a strict duty of loyalty but should act in good faith. They are not automatically subject to a non-compete clause, unless the partnership agreement explicitly includes one.

Profit and loss allocation for limited partners

Limited partners share in profits and losses of the limited partnership, typically in proportion to their capital contributions, unless the partnership agreement specifies a different allocation.

Losses are also allocated based on capital contributions, but limited partners can only lose up to their total investment. They are not liable for additional losses or debts beyond this amount. If a limited partner’s capital account falls below their initial contribution due to losses, future profits may first be used to restore the balance, depending on the partnership agreement.

Unlike corporations that distribute dividends to shareholders, limited partnerships distribute profits directly to partners as agreed in the partnership agreement. Limited partners do not receive a salary, and payments are typically treated as profit shares or drawings rather than wages.

Please note the legal disclaimer for this article.