Generally speaking, a Partnership, a is a business owned by two or more individuals formed with a view to a profit.
At Common Law Partners in a partnership share profits equally and are considered jointly and severally liable for the debts of the Partnership.
In most jurisdictions a Partnership is not an income reporting, or tax paying, entity; it is rather a flow through vehicle ie it invoices and receives payment from customers and pays suppliers/creditors and then “passes through” the remaining profit to the partners who report the income/account for taxes wherever the Partners may be resident for tax purposes.
There are three forms of partnerships: general partnership, joint venture, and limited partnership. The three forms differ in various aspects, but also share similar features.
A limited partnership (LP) is a partnership made up of two or more partners whereby the general partner oversees and runs the business while the limited partner contributes capital to, but does not partake in managing, the business. The general partner has unlimited liability for the debt, and any limited partners have limited liability up to the amount of their investment.
The English LP
There are 3 options for set up of an LP in the UK ie
- An LP formed in England & wales
- A Scottish LP
- A Northern Ireland LP
In order to establish an LP in England/Wales a duly completed and signed Form LP5, together with the filing fee, must be submitted to Companies House in Cardiff.
The Form LP5 contains the following information:
- The name of the LP, which must end in Limited Partnership or LP. A Limited Partnership registered in Wales may end in Partneriaeth Cyfyngedig or PC;
- The general nature of the business;
- The principal place of business address;
- The full name of the general partner and each limited partner;
- The term of the partnership, if any;
- A statement of limited liability
- A statement of the capital contribution of each Limited Partner
Provided that the Form LP5 is in order, the LP will come into existence on registration of the form at Companies House.
LPs must have at least one general partner and one limited partner at all times. Partners can be individuals or corporate bodies and there is no restriction as to the nationality, or residence, of the partners.
The general partners are responsible for the management of the LP and are jointly responsible for the debts and obligations of the LP. In contrast, the Limited Partners play a passive role in the business affairs, simply providing capital contribution. The Limited Partners are afforded the benefit of limited liability protection, provided that they do not engage in the management of the LP.
The Partnership Agreement
While not legally required, it is recommended that the partners enter into a private, written partnership agreement. Such an agreement would generally detail the nature of business, the administration of the LP, the division of profits and the dissolution arrangements.
LPs must keep appropriate records of their financial affairs to enable the financial position of the LP to be determined at any time. LPs are not required to file their accounts with Companies House unless the Partnership (Accounts) Regulations 2008 apply.
LPs are tax transparent, therefore, in order to assess tax liability, the UK tax authorities will look to the partners of the LP rather than to the LP itself. In addition, if the LP does not trade in the UK, and the partners are not resident in the UK, the partners will not be subject to UK taxation.
Regardless of whether the partners are subject to UK taxation or not, LPs are required to file an annual Partnership Tax Return and accompanying accounting schedules with HMRC (ie the UK Tax Authority/Dpt) . The return must show each partner’s share of the profits or losses of the activities of the LP.
In the event of the dissolution of an LP, the general partners are required to wind up its affairs. It is best practice to notify Companies House of the dissolution, however, the LP will continue to exist on the index of names held by Companies House.
Key Features and Benefits of the English LP
There are a wide range of benefits in utilising English LPs:
1. Limited Liability for the Limited Partner: The Limited Partner can benefit from receiving profits in the English LP whilst also benefitting from limited liability on their investment.
2. Use of Corporate General Partners: Although General Partners have unlimited liability, corporate partners are permitted. Therefore, if correctly structured, they can protect themselves from unlimited liability.
3. Fiscal Transparency: The English LP is fiscally transparent, meaning that all income, profits and losses flow through to the Partners.
4. Filing Requirements: English LPs which are not defined as ‘qualifying partnerships’ are required to prepare its accounts under the Partnership (Accounts) Regulations 2008 (SI 2008/569) in order to demonstrate its financial positions and to assist with the preparation of the Partnership tax return. English LPs, which is not a separately legal entity, are not currently required to file a confirmation statement or maintain a person(s) of significant control register for inspection to the public.
5. Privacy of the Limited Partnership Agreement: The English LP may have a written Limited Partnership Agreement between the general partner(s) and the limited partner(s). If the English LP has been registered for a specific purpose, the clauses of the agreement may be tailored depending on that purpose. The partnership agreement might also state the rights and obligations of the partners including the capital contributions and profit sharing ratios. The English LP benefits from maintaining the limited partnership agreement as a private document which does not need to be filed or disclosed with Companies House.
With careful structuring a UK LP will not be subject to UK taxation.
An LP registered in England is not a separate legal entity, hence it must contract through a/the General Partner.
Limited Partnership consists of 1 (or more) general partners who exercise its management, and 1 (or more) limited partners who made a contribution into partnership’s capital (by means of money or other property with monetary evaluation).
The general partner is liable for all debts and obligations of the partnership. The limited partner’s liability is limited to the amount of contribution he made.
An English LP has no directors and secretaries. The General partner exercises management and enters into transactions on behalf of the LP (as well as other persons authorized by the partnership by Power of Attorney).
An English LP itself is not subject to taxation in the UK. The LP’s profit is distributed to its partners who must pay taxes in their country of tax residence.
An English LP must prepare annual accounts, but if it is the case that the general partner is a foreign (not British) company, filing of the accounts with Companies House is not required.
An English LP and each of its partners must file annual tax returns.
As a Limited Partner:
- You contribute an amount of money or property to the business when it’s set up but you are only liable for debts up to the amount you’ve contributed.
- You can’t manage the business can’t remove your original contribution
- You must register for Self Assessment with HM Revenue and Customs (HMRC).
As a General Partner:
- You are liable for any debts that the business can’t pay
- You control and manage the business
- You can make irreversible (‘binding’) decisions for the business
- You can apply for your business to act as an authorised contractual scheme (ACS
- You must register the business with Companies House and register the business for Self Assessment with HMRC (you must also register the business for VAT if you expect sales to be more than £85,000 a year)
- You act for the business if/when it’s wound up and dissolved
It should be noted that (unlike a Scottish LP) an English LP is not a legal entity.
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Disclaimer: OCI Ltd are not Tax advisers or Legal advisers. You should seek local tax, legal and financial advice before committing to set up an entity such as that described above.