What Is A Limited Liability Partnership Agreement?

When it comes to starting a business, one of the most important questions you should ask yourself is, “What business structure is best for me?”.

This is because your structure will need to be suited to your business goals, resources and finances. One of the most common types of structures is a partnership, but there are a few things to note in this area. 

What Is A Partnership?

A partnership is a type of business structure that is common due to its simple and relatively cheap set-up process. It generally involves two or more people working together to run an enterprise. 

There are multiple types of partnership:

• Limited partnerships
• General partnerships

What Is A Limited Partnership?

Limited partnerships in New Zealand allow for one or more general partners to be responsible for the management of the partnership, while limited partners contribute capital and share in the profits but are not involved in the day-to-day management. Limited partners also enjoy limited liability, meaning they are not personally liable for the debts of the partnership beyond their investment.

What Is Limited Liability?

Liability refers to the legal responsibility over something. Limited places a cap on this. Thus, limited liability means there is only a certain extent to which responsibility can be extended.

In the context of limited partnerships, the liability being referred to is the financial obligations of the partnership. A limited partner cannot be liable for more than the amount they have contributed to the partnership.

If you’re familiar with a company structure, they also have limited liability. This just means that where the company owes money to another party, that is the business’ responsibility as a separate legal entity. The shareholders will not be personally liable for paying that debt. 

A good way to define the term ‘limited liability’ is to see the business as its own person. So, like a human, it is capable of owing money and being owed money. 

How Is A Limited Partnership Different To Other Business Structures?

There are multiple types of business structures and partnerships for businesses to consider. A limited partnership may be suitable for your business if you plan on expanding. Comparing it to the other business structures out there can help you decide.

A sole trader will work on their own. They are the only owner of their business, so all responsibility, loss and gains fall on them. In other words, they have unlimited liability – the business’ debts are also their personal ones. 

A company is a legal entity on its own. It can buy and sell property and incur debt like a person. The business structure of a company means it is controlled by directors and owned by shareholders.

A general partnership has all the elements of a business partnership. However, without the limited liability aspect, the partners are equally responsible for the actions of one another and the debts of the partnership.

How Do I Set Up A Partnership?

In New Zealand, setting up a limited partnership requires registration with the New Zealand Companies Office. You will need to provide details about your business and the partners involved. Once the application is lodged and successful, you will receive a certificate of registration. 

After that, your partnership is officially a registered business and you’re ready to move ahead!

When Do I Need A Limited Partnership Agreement?

As soon as the parties decide to go into business together, the aforementioned things should be hashed out. Before the business begins, a Partnership Agreement should be entered into. It’s advisable to have the agreement written and signed before registering the business together,

Therefore, if there is a fallout, no legal work has taken place yet.

What Does A Limited Partnership Agreement Include?

A Limited Partnership Agreement is a contract between the business partners that details the purpose and confinements of their working relationship. To set up a limited partnership, you will need to decide on a number of things, such as:

• The motivation behind the business
• Identifying the respective partners of the business
• The main postal address and bank account
• Rights and responsibilities of each partner
• The powers of each partner
• What the management of the business will look like
• Financial responsibilities
• Decision making and conflict resolution
• Exit clauses

It’s advisable to seek the counsel of an experienced legal expert when drafting these agreements.

Advantages Vs Disadvantages

There are multiple pros and cons to running a limited partnership.

What Are Some Pros?

• Flexibility – limited partnerships offer flexibility in terms of investment and involvement, allowing partners to choose their level of engagement with the business.
• Simplicity – the business structure is simpler to set up than a company.
• Taxation – the partnership itself is not taxed; instead, partners are taxed individually on their share of the partnership’s income.
• Protection – limited partners have protection from personal liability for the debts and obligations of the partnership beyond their investment.

What Are Some Cons?

• Liability for general partners – general partners have unlimited liability for the debts and obligations of the partnership.
• Management restrictions – limited partners cannot be involved in the management of the partnership without risking their limited liability status.
• Adding new partners – can be more complex than in other business structures and may require the agreement of all existing partners.
• Regulatory compliance – limited partnerships must comply with the Limited Partnerships Act 2008 and other relevant New Zealand legislation.

Key Takeaways

A limited partnership is a smart way to structure a business in New Zealand, offering flexibility and protection for limited partners. However, it is important to understand the responsibilities and liabilities associated with this type of business structure.

Deciding whether or not this business structure is right for your endeavour usually requires some expert advice.

If you would like a consultation on your options going forward, you can reach us at 0800 002 184 or [email protected] for a free, no-obligations chat.

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