Investing in a Limited Partnership? Some legal points to consider
With over 2,500 reportedly registered in New Zealand, limited partnerships have proven to be a popular legal structure since being introduced a little over a decade ago. Limited partnerships are now commonly used for commercial property syndicates and other pooled investments. This article provides a refresher on the key features of a limited partnership and its differences from other legal structures.
A limited partnership is similar in many respects to a company, in that it is a separate legal person and carries on business in its own name. The limited partners contribute its capital and, like the shareholders in a company, have limited liability (although there is an exception to this, discussed below).
There are, however, some key differences to a company – there is a “general partner” (the GP) that is responsible for the management of the partnership. There are also important differences about how limited partners are treated for tax purposes (also discussed below).
Limited partnerships are governed by the Limited Partnerships Act 2008 (LP Act). The minimum requirements for a new limited partnership are as follows:
(a) There must be at least one GP;
(b) There must be at least one limited partner;
(c) The GP must satisfy certain residency requirements – for example, if the GP is an individual, that person must live in New Zealand. If, as is commonly the case, the GP is a company, at least one of its directors must live in New Zealand or in Australia (provided the director is also a director an Australian company);
(d) There must be a partnership agreement (also discussed below); and
(e) The limited partnership must be registered with the Companies Office.
Investing in a limited partnership:
Limited partnerships are common legal structures for investments, especially for syndicates investing in commercial property. If the investment opportunity is available to the wider public, the partnership will most likely be regarded as a “managed investment scheme” under the Financial Markets Conduct Act 2013 (FMC Act). Such schemes are subject to governance requirements, including that the manager of the scheme (most likely the GP) needs a licence from the Financial Markets Authority and there will also be an independent statutory supervisor. Investors will need to receive a product disclosure statement before becoming limited partners.
A large number of limited partnerships, however, are offered only to “wholesale investors”. In this case, the investment is not subject to the disclosure and governance requirements of the FMC Act. The operation of the partnership will be largely governed only by the partnership agreement.
The partnership agreement addresses how the limited partnership is operated. The LP Act sets out some minimum requirements for the agreement, including items such as restrictions on transfers of partnership interests, restrictions on business activities, and how partners leave the partnership. Generally, partnership agreements are similar to shareholders’ agreements for companies and address many of the same issues.
It should be noted that if the LP is captured as a managed investment scheme, there are additional requirements under the FMC Act that will apply to the partnership agreement.
Involvement of limited partners:
As a basic rule, a limited partner has a passive roll in the partnership. The limited partners provide the capital, receive distributions and are entitled to a share of surplus assets if the partnership is wound up.
Limited partners do not participate in the day-to-day running of the partnership (that is the role of the GP). Under the LP Act if a limited partner is found to taken part in the management of the partnership, it may lose its limited liability status.
The LP Act, however, does specify certain activities which are deemed to not involve management of the partnership (the so-called “safe harbour” activities). Broadly speaking, the safe harbour activities are all significant or fundamental decisions relating to the partnership. The list of safe harbour activities is not exhaustive, but expert legal advice should be taken if a partnership agreement contemplates limited partners being involved in matters outside of the list in the LP Act.
The financial and performance reporting provided to limited partners depends on how the limited partnership has been set up. If the partnership is a managed investment scheme, it is required to prepare audited financial statements and provide annual reports to the limited partners.
Wholesale limited partnerships will vary. These matters are addressed in the partnership agreement. If the partnership is “large1”, annual audited financial statements are mandatory. Any limited partnership may opt into that reporting requirement. The partnership agreement should address what financial reporting will be available to the limited partners.
All limited partnerships must keep accounting records.
Limited partnerships are subject to tax in a similar manner to ordinary partnerships. This means that profits and loses are treated for tax purposes at the level of the partners themselves in proportion to their partnership interests (for this reason, limited partnerships are often referred to as “flow through” structures). Specialist taxation advice should be obtained before investing in a limited partnership.
The partnership’s name and registration number, registered address and address for service, and the GP’s name and address are publicly available on the limited partnerships register. If the GP is a New Zealand registered company, the names and addresses of its directors and shareholders will also be available on the Companies Register.
The names, addresses and dates of birth of the limited partners are kept confidential. However, this information must be provided to the registrar. It should be noted that the registrar also has information gathering powers and other enforcement powers under the LP Act.
Popularity of limited partnerships:
Limited partnerships are now a well-established legal structure for investments in New Zealand. If you are thinking about investing in a limited partnership, or you are considering using one for your next business venture, please do not hesitate to contact us if you have any questions.
A limited partnerships is “large” if, as at the balance date of its two preceding accounting periods, its total assets (together with any subsidiaries) exceeded $60m; and/or, in each or its two preceding accounting periods, its total revenue (together with any subsidiaries) exceeded $30m.
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Gerard Dale, Claire Evans, Graeme Crombie, Evelyn Jones, Anna Ryan, Joelle Grace, Nicola Hardy, Peter Orpin, Ellen Sewell, Matt Tolan, Kristina Sutherland, Jacob Nutt, Danita Ferreira, Whitney Moore, Stephanie Bode, Carlo Wan, Alex Stone, Ben Cooper, Lisa Catto, Cameron Hart