This outline summary describes the basic uses and main features of a limited partnership created under the Limited Partnerships Act 1907 (the 1907 Act) when applied to dealing in the development and investment of UK real estate.
For the holding of UK real estate, a limited partnership has a number of attractions. These are principally:
- Flexibility - a limited partnership structure is not subject
to the disclosure and compliance burdens of company law.
- Tax transparency.
Limited partnerships are simply a special sort of ordinary partnership. All the normal rules applicable to ordinary partnerships apply to limited partnerships, except as modified by the 1907 Act.
The main rules applicable to partnerships generally are contained in the Partnership Act 1890 (the 1890 Act) and a large volume of associated case law.
For a partnership to exist, two or more persons (which includes companies) must be "carrying on a business in common with a view of profit". Simple joint ownership of assets does not of itself create a partnership, whether the owners share profits from the use of the common asset or not.
A partnership is not a separate legal entity in the same way as, for example, a company. In law, when action is taken by or against a partnership, it is being taken by or against the underlying partners collectively.
If a partnership exists, then the partners collectively are known as a "firm". Any act of any partner which is done for "carrying on in the usual way business of the kind carried on by the firm" will generally bind the firm collectively and each partner. Consequently, each partner is liable jointly with all others for all debts and obligations of the firm incurred while he is a partner. This extends to liability for any loss or injury to third parties caused by any partner acting in the ordinary course of the business of the firm, or for misapplication of a third party's money by the firm or a partner.
Partnership property is held on trust for the partners, to be held and applied exclusively for the purposes of the partnership and in accordance with the partnership agreement.
The partners owe a general duty of good faith to each other in relation to the business of the partnership.
Modifications of the normal rules for limited partnerships
The 1907 Act provides for the creation of limited partnerships. The essential distinctive feature of a limited partnership is that it has two categories of partners - limited partners and general partners. There must be at least one partner of each category to make up a limited partnership.
The general partner(s) are liable without limit for all debts and obligations of the firm in the usual way. The limited partners must, at the time of entering into the partnership, contribute (in cash or in kind) partnership capital but they have no liability for the debts or obligations of the partnership beyond the amount so contributed. A limited partner may not withdraw its capital from the partnership during the life of the partnership, on pain of being liable for the firm's obligations up to the amount withdrawn.
For this reason, it is common for limited partners to inject a nominal amount of capital, the bulk of their contribution to the assets of the partnership being by way of loan.
A limited partner is prohibited from taking part in the management of the partnership business, on pain of becoming automatically liable for all debts and obligations of the firm while it does so. It is permitted to inspect the firm's books, "examine into the state and prospects of the partnership business" and "advise with the partners thereon". It has no power to bind the firm.
A limited partnership must be formally registered as such at Companies House...