How to distribute profits in a limited partnership

In a UK limited partnership, partners have significant flexibility in deciding how profits and losses are shared. While default rules exist, customised arrangements can be set out in the partnership agreement — as long as they are clearly documented and reflect the agreed roles and contributions of the partners.

How does profit distribution work in a limited partnership?

Limited partnerships in the UK are governed by the Limited Partnerships Act 1907, along with provisions from the Partnership Act 1890. When it comes to profit distribution, partners are encouraged to set out clear terms in a partnership agreement at the time of formation.

If no such agreement exists and a dispute arises, a court will refer to the default provisions of the Partnership Act 1890, which generally state that profits and losses are shared equally, regardless of capital contribution or involvement in the business.

This highlights the importance of having a written partnership agreement to avoid ambiguity and prevent legal disputes. Always consult a legal professional to ensure your agreement accurately reflects each partner’s contribution, role, and risk exposure.

Why is it important to outline limited partnership profit distribution in a partnership agreement?

Without a partnership agreement, the default legal rules apply — which may not reflect the actual expectations or financial realities of the partners. A customised agreement is especially useful when there are significant differences in:

• Capital contributions
• Involvement in management or operations
• Risk and liability exposure

For example, general partners, who bear unlimited liability and actively manage the business, may be entitled to a larger share of the profits. Limited partners, who are typically passive investors, may receive profit shares in proportion to their capital contributions.

Differences between general partners and limited partners regarding profit distribution

In a UK limited partnership, profit distribution is primarily governed by the partnership agreement. However, the differing roles of general partners and limited partners result in key distinctions in how profits are allocated.

General Partner

• Management role: Responsible for the day-to-day management of the business.
• Liability: Bears unlimited personal liability for the debts and obligations of the partnership.
• Profit Share: May receive a larger or preferential share of profits, particularly when they take on greater responsibilities or risk.
• Compensation: Can also be granted a fixed or priority payment as part of the partnership agreement.

Limited Partner

• Passive role: Does not take part in the management of the partnership.
• Liability: Liability is limited to the amount of their capital contribution, provided they remain passive.
• Profit share: Typically receives a share of profits based on their contribution or as otherwise agreed in the partnership agreement.
• Restrictions: If a limited partner becomes involved in management, they risk losing their limited liability status.

Example of how profits can be distributed in a limited partnership

Let’s say three individuals form a limited partnership and agree on a custom profit-sharing arrangement:

• Sarah – General Partner
• John – Limited Partner
• Lisa – Limited Partner

Here are their initial capital contributions:

• Sarah (GP): £50,000
• John (LP): £100,000
• Lisa (LP): £150,000

Total capital: £300,000

Sarah, as the general partner who manages the business, is entitled to 30% of the annual profits. John and Lisa, the limited partners, share the remaining 70% in proportion to their capital contributions.

If the total annual profit is £100,000, the distribution would be as follows:

• Sarah (30%): £30,000
• John: (100,000 / 250,000) × 70,000 = £28,000
• Lisa: (150,000 / 250,000) × 70,000 = £42,000

Please note the legal disclaimer for this article.