More than a century on, Limited Partnerships remain popular, given they benefit from the tax and confidentiality advantages of partnerships, with the added attraction of limited liability for their limited partners. In more recent times, they are used by promoters of Irish regulated funds as they are treated as “look through entities” for tax purposes and are a cost effective way of creating separate security packages where financing is on a limited recourse basis.
What is a limited partnership?
A limited partnership (“LP”) is governed by The Limited Partnership Act 1907. An LP does not have a legal personality separate from its partners and only the limited partners can benefit from limited liability. An LP must comprise at least one partner with unlimited liability, known as a general partner, and at least one limited partner whose liability is limited to the amount of capital it contributes to the partnership. The partners will enter into a partnership deed, which sets out the basis on which the LP is to be organised and their respective rights and obligations as partners.
As the liability of the general partner is unlimited, limited liability companies are often used in this role, thus limiting the liabilities of any shareholders in the general partner.
A limited partner cannot participate in the management of the firm and cannot have any authority to bind the other partners. Should a limited partner take part in the management of the business, the limited partner will have unlimited liability for the debts and liabilities incurred during the period when the limited partner participated in its management.
LPs in funding structures
Nowadays, LPs are commonly found sitting under regulated fund structures. LPs are often used by promoters of Irish regulated funds as they are treated as “look through” entities from a direct tax perspective. The partners of LPs are instead subject to tax on their profit share, as provided for in the LP deed.
Another reason LPs are used in these structures is that they help create a separate security package in a sub-fund structure where limited recourse financing is being provided. Multiple limited partnerships can be used under one sub-fund, thus creating a separate security package for lenders and reducing the set-up and on-going costs of multiple sub-funds.
Practicalities for lenders
Over and above the usual checks undertaken when lending to a corporate entity, lenders to LPs should be aware of the following:
- registration - every LP must be registered with the CRO;
- an LP deed needs to be reviewed carefully. An LP deed will typically include:
- partnership name;
- nature of the business and management to be conducted for and on behalf of the LP by the general partner;
- change of partners - resignation, expulsion, transfer of interests or new additions;
- distribution / application of profits - discharging creditors should always be first;
- limits of Authority on the general partner’s powers; and
- any loan agreements or security documents will be entered into by the general partner for and on behalf of the LP;
- filings - accounts for the LP must be filed in the CRO; and
- partnership register – this may be checked on the CRO website.
Currently, LPs remain a popular option in finance structures from a tax and security perspective. Lenders need to be aware of the legal subtleties associated with the partnership structure and, particularly, any separation of the legal and beneficial interest in the assets held by the general partner for the LP, when taking security.