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Limited Partnerships: proposed change

The Limited Partnership, LP, is the legal vehicle of choice for UK private funds. Currently, the Limited Partnerships Act 1907 determines the legal regime. Often labelled “deficient”, the UK Government, on Treasury advice, is updating this regime.

Limited Partnership Act 1907: proposed amendments

The proposed amendments:

  1. Waive the limited liability partner’ requirement to contribute capital to the Limited Partnership;
  2. Entitle the Limited Partnership’s  partner to:
    • Withdraw capital without having to return the capital at a later date to meet the Limited Partnership’s liabilities; and
    • Undertake permitted management activities without jeopardising the limited liability shield.

Partnership structures

Under a general partnership model, all partners are:

  • Liable for the business’s losses;
  • Risking unlimited liability.

In a limited liability partnership, each partners’ liability is capped at their capital contribution.

A Limited Partnership fuses a general and a limited liability partnership. Some partners forgo their partnership management responsibilities, in exchange for limited liability status. However, one general partner in the Limited Partnership must assume unlimited liability.

Limited partnerships: current regulation

Until the reforms take effect, a Limited Partnership partner with limited liability status must:

  • Contribute capital to the Limited Partnership;
  • Not withdraw their capital contribution until the Limited Partnership is wound up;
  • Not interfere with the Limited Partnership management, which is reserved for the general partner; and
  • Place a notice in the London Gazette, when leaving the partnership.

Current regulations: problems

Many Limited Partnership partners contribute via capital and a loan, to avoid the capital withdrawal limitations. The partnership repays the partners’ loan during it’s lifetime.

So, if a Limited Partnership partner with limited liability status withdraws capital, the Limited Partnership can require the partner to return the capital to meet liabilities.

In addition, a limited liability partner can lose limited liability status by interfering with the Limited Partnership’s management. Hence, management activities are reserved for general partners.

Limited partnerships: proposed changes

For investment funds, the Government intends the Limited Partnership vehicle to remain attractive. The proposed changes are the Government’s attempt to keep up with offshore competitors.

The proposed changes would permit a Limited Partnership partner with limited liability status to:

  • Undertake management activities for the fund,
  • Retain limited liability status.

Limited partnership management

There will be a “white list” of activities, which will be debated. Depending on the “white list”, Limited Partnership partners may gain a degree of certainty. In addition, limited liability status partners:

  • Won’t be required to contribute capital to the Limited Partnership;
  • Who contribute capital, can have their capital returned during the Limited Partnership’s lifetime;
  • Are no longer required to announce their departure in the London Gazette.

Gannons comment

Broadly speaking, the proposed changes are good news for private funds and their partner managers. The changes would incentivise fund managers and partners to register UK partnerships.

The changes would enable UK-based private funds to match their offshore counterparts. However, offshore jurisdictions remain attractive.

We advise fund managers, general and limited liability partners, on the appropriate steps to restructure and take advantage of the Government latest initiative.

 

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