What’s so exciting about Limited Partnerships?
Limited partnerships are a modern, flexible and internationally recognised business structure. The limited partnership regime is a hybrid of company law and partnership.
The limited partnership is a separate legal entity (like a company). The limited partnership will own assets and enter into contracts for goods or services with third parties. The Limited Partners (investors) have limited liability. Therefore, if the limited partnership were to fall on hard times and not be able to pay its debts, a creditor could not look to the limited partners.
However, for tax purposes the limited partnership is not treated as a separate legal entity. It is treated like a partnership. Therefore, the expenses, profits or losses of the limited partnership are those of the Limited Partners. In other words, the limited partnership regime provides flow through of the losses or non-taxable gains to the Limited Partners.
This will be hugely beneficial for property investors. No longer will investors need to use a LAQC company to obtain the benefit of losses of the LAQC. Also, capital can be returned to the investors provided the limited partnership is solvent at the time.
What is Needed for a Limited Partnership?
To register a limited partnership you need:
· at least one General Partner;
· at least one Limited Partner;
· a written limited partnership agreement, which at a minimum covers the items required by section 10 of the Act.
There are set forms that need to be completed and submitted to the Companies Office. On registration the limited partnership is formed. It will exit until it is deregistered.
General Partner
The management and control of the limited partnership rests with the general partner (like a Company’s directors). Therefore, if you wish to do business with a limited partnership you must determine who the general partner is and only deal with that person. You can do this by searching the Limited Partnership register with the Companies Office.
Limited Partners are not to be involved in the management of the limited partnership. If they do, they risk becoming liable for any losses suffered by a third party who has been dealing with a limited partner.
Limited Partners
The identity of the Limited Partners is confidential. However, their identity must be provided to the Companies Office on registration. Their identity is not available when searching the Limited Partnership Register. Nor can this information be obtained using an Official Information Act request.
The limited partnership regime has distinct advantages over Companies and Partnerships for investments where:
· losses are expected early on;
· investments are likely to experience capital gains;
· centralised or specialised management is required and the start-up running costs are high.
General Partner’s role
Limited partnerships are a hybrid of a company and a partnership. A limited partnership is a separate legal entity (like a company) but, for New Zealand tax purposes, is transparent in that losses and gains are attributed to the limited partners directly (like a partnership).
Who can be a General Partner?
There must be at least one General Partner. The General Partner could be an individual, a company, a trust, a partnership or a limited partnership. The only limitation is that a General Partner cannot be a Limited Partner also.
What does the General Partner do?
Management: The General Partner is responsible for the day-to-day management and running of the business of the Limited Partnership. The General Partner is an agent of the Limited Partnership and is authorised to bind the Limited Partnership. In other words the General Partner will sign all contracts on behalf of the limited partnership.
Administration: The administrative duties of the General Partner include:
· Preparation of financial statements
· Notifying the Companies Registrar of any change in details relating to the Limited Partnership
· Ensuring the Limited Partnership keeps records at its place of business
· Completing and filing the annual return with the Registrar.
Distributions: The General Partner authorises distributions. Before doing so the General Partner must be satisfied on reasonable grounds that immediately after the payment of the distribution the Limited Partnership will be solvent. The solvency test is similar to that in the Companies Act 1993 in that the Limited Partnership must be able to pay its debts as they become due in the normal course of business. Also the value of the Limited Partnership’s assets is greater than its liabilities, including contingent liabilities.
A General Partner who pays a distribution when the Limited Partnership is not solvent must personally repay the distribution if it is not able to be recovered from the Limited Partner(s) who received it.
Contributions: General Partners can make capital contributions to the Limited Partnership. However, this would be unwise due to the unlimited liability that a General Partner has for the residual debts of the Limited Partnership. If the General Partner makes a capital contribution then they are entitled to receive distributions.
Liability: The General Partner has residual joint and several liability with the Limited Partnership for the debts of the Limited Partnership. In other words, if there is a shortfall in money owed by the Limited Partnership to a creditor, then a creditor can look to the General Partner for payment of that debt.
If there is more than one General Partner then each General Partner is jointly and severally liable with the Limited Partnership for the debts and liabilities of the Limited Partnership while they were a General Partner.
Role of the limited partner
Investor: Limited partners are passive investor in limited partnerships. Limited partners’ identity is confidential and therefore not publicly searchable. This is to encourage investment in New Zealand by New Zealanders as well as overseas investors.
Generally the limited partners contribute assets and capital to the limited partnership.
No Management: Limited partners are not allowed to take part in the management of the limited partnership only general partners are. Therefore, limited partners can not enter into contracts on behalf of the limited partnership as they have no power to bind the limited partnership.
Limited liability: Limited partner’s liability is limited to their capital contribution to the limited partnership just like a company’s shareholders. In other words limited partners are not responsible for the liabilities of the limited partnership. Compare this with general partnerships where the partners are personally liable for the debts of the general partnership.
If a limited partner breaches the “no management rule” that limited partner will lose its limited liability if their breach results in a loss to a third party. The limited partner will be liable, as if they were a general partner, however, they will not have the benefit of residual liability as a general partner does. Also the other limited partners may sue the breaching limited partner.
Distributions: Limited partners are entitled to distributions from the limited partnership. However, if a limited partner knew that the limited partnership would not be solvent immediately after payment of a distribution then that limited partner must repay the distribution to the limited partnership.
The limited partner has a defence of partial solvency if part of the distribution could have been paid without the limited partnership becoming insolvent. This liability ceases three years after payment of the distribution.
Tax: The limited partnership is not taxed as a separate legal entity. It is fiscally transparent in that tax is levied on the limited partners. Therefore, the tax status of each limited partner governs the way each partner is taxed. For example, if there are three limited partners, one a company, one a family trust and one a charitable trust then they will be taxed at 30%, 33% and 0% respectively.
Limited partnership losses can be accessed directly by the limited partners up to the amount of their capital contributions together with the amount each limited partner is liable for the partnership debt. For example, a limited partner may have guaranteed the repayment of the limited partnership loans from the Bank.
There is no tax on capital distributions.
In summary, there are many benefits to using a limited partnership rather than a general partnership or a company. For those who are investing in property, whether it is a farm or a commercial building, a limited partnership is likely to be a useful ownership vehicle.
