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On 2 May 2008, the Limited Partnership Act 2008 (the Act) came into force introducing into New Zealand the limited partnership legal structure. Already commonly used overseas, limited partnerships allow investors to enjoy the benefit of a separate legal personality and limited liability protection, but preserve the tax and confidentiality advantages associated with partnerships generally. This note describes the key features and advantages of a limited partnership.
The limited partnership structure is ideally suited to investment funds and this purpose was the main driver behind the development of the legislation in New Zealand. The rationale for introducing the structure into New Zealand is recorded in the Act as being to:
"…establish a modern regulatory regime of limited partnerships to:
(i) give the business community in New Zealand the option of a flexible and internationally recognised business structure similar to limited partnerships in use in overseas jurisdictions; and
(ii) facilitate the development of the venture capital industry in New Zealand."
The second rationale reflects the concern that inwards investment by international investors was adversely affected by lack of familiarity with, and certain unattractive features of, pre-existing legal structures. It is anticipated that the new regime will assist in encouraging foreign investors to diversify their portfolios by investing in the New Zealand market.
The Act replaces the previous special partnership regime which did not have much popularity.
Key Features and Advantages
A limited partnership must have at least one general partner and one limited partner at all times (who cannot be the same person). The general partner is an agent for the limited partnership and is the active manager, responsible for the day-to-day management of the limited partnership. This distinction is important in the context of investment funds which have active managers and more passive investors.
Limited partners are passive investors who contribute capital to the limited partnership and are only liable to the extent of their capital contributions. This is on the proviso they do not take part in the management of the limited partnership (known as the "control rule"). However, limited partners are able to participate in a variety of "safe harbour" activities not considered to be active managing of the limited partnership. These "safe harbours" cover typical activities undertaken by investor advisory committees so participation in these will not see loss of limited liability protection.
Every limited partnership must have a limited partnership agreement. Partners are largely provided with a certain amount of flexibility in relation to the content of the agreement, including being able to contract out of fiduciary obligations. These remain a default position. This is important since the compulsory inclusion of such principles tends to be inappropriate in the context in which many limited partnerships are established.
Like a company, limited partnerships enjoy separate legal personality from their owners. Advantages of this include:
a. efficiency in contracting (which is effected by the general partner as agent for the limited partnership);
b. limited liability protection, whereby limited partners are protected from any losses and claims that arise out of the limited partnership's activities; and
c. continuity and succession, such that there is no technical dissolution when members retire and no need to put in place succession arrangements such as indemnities and novations upon changes to the partnership make-up.
Like a company, a limited partnership is created on registration with the Registrar of Companies in the prescribed form. The application must be accompanied by the written consent of each proposed general partner, limited details of the limited partners (which will not be available to the public) and certification that the proposed partners have entered into a partnership agreement which complies with the Act. Importantly, details of limited partners capital contributions are not required to be disclosed.
Whilst the Act requires that accounts must be prepared and held at the registered office, there is no requirement for these to be filed.
Limited partnerships return profits via distribution. Distributions are typically by reference to the relevant partners' pro rata capital contributions. Both general partners and limited partners are entitled to make capital contributions. Like a company, such distributions are subject to the solvency test.
The profits of the business of a limited partnership are taxed as if the business was carried on by partners in partnership (known as "flow through" tax status). This is in contrast to the position of a company, which is regarded as a separate taxable entity. Any loss or profit from the limited partnership flows through (on a pre tax basis), and is attributed directly to the partners to the extent of the partner's economic interest in the limited partnership.
A limited partnership terminates when it is formally removed from the register. However, there is scope under the Act to build into the limited partnership agreement other termination events. This is useful in the context of structuring a venture capital fund for a set duration (for example, 10 years with a right to extend for two years). The authority of a general partner still continues after the terminating event to the extent that it is required to wind up the limited partnership.
This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.
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