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Limited Partnerships - A New Business Entity In Singapore
June 2009 | Corporate | Business Bulletin
Sunil RAI
Introduction
Singapore recently welcomed a new business vehicle – the limited partnership – when the Limited Partnerships Act 2008 ("LPA") commenced operation on 4 May 2009. The Accounting and Corporate Regulatory Authority ("ACRA") is the administering authority of the LPA.
This new business vehicle provides a structure which, in summary, comprises at least one general partner with unlimited liability and limited partners with limited liability, and separates ownership from management. A limited partnership ("LP") is essentially a general partnership but with passive investors in the form of limited partners. This structure is common in the UK and US, and has been often used in Europe for private funds. The LP is a vehicle which is well suited to limited life, self-liquidating funds. For example, funds that intend to have a charter life of eight years may consider adopting this vehicle for the fund's activities. The LP is therefore expected to appeal to niche markets like private equity and fund investment businesses. It is also attractive to investors who do not wish to take an active management role and who prefer to entrust management to someone willing to bear unlimited liability.
This article highlights key features of the LP which should be considered when it is used as a vehicle for business activities or for raising capital.
Setting up a limited partnership
| (1) | Registration and renewal |
| Registration is relatively quick and convenient and costs only S$50. After registration, the name of the LP has to contain the words “limited partnership” or the abbreviation "LP" in all its invoices and official correspondences.
Unlike an incorporated company, an LP has less onerous reporting requirements and administrative duties but, as the LP has a limited life span of just one year, its registration has to be renewed on an annual basis. Also, the LP exists as long as there is one general partner and one limited partner. If there is no limited partner, the partnership will be suspended and the LP will be converted to a firm registered under the Business Registration Act. However, once a limited partner is appointed, the registration of the LP will be restored to a 'live' status. In this regard, it is important to note that the failure to renew registration could result in the loss of LP status and the LP may instead be treated as a general partnership. In short, limited partners may lose their limited liability status due to a failure to file a renewal of the LP. |
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| (2) | Parties in the limited partnership |
| There are generally three parties in an LP – a limited partner, a general partner and a local manager. An individual (above 18 years of age) or a corporation may become a general partner or a limited partner of an LP. Each partner need not be ordinarily resident in Singapore which makes the LP attractive to foreign investors. However, a local manager has to be appointed if every general partner is ordinarily resident outside Singapore. | |
| (3) | Records |
| The LPA does not require an LP to lodge share capital information or the respective contributions of partners with ACRA. The LPA also does not prescribe the requirements for financial reporting or for accounting standards to be adopted. Therefore, information regarding contributions and the financial performance of an LP do not become readily available to the general public. However, every general partner is required to ensure the proper keeping of accounting and other records that will sufficiently explain the transactions and financial position of an LP. These records must be retained for at least five years as the Registrar may require such records to be produced for inspection. |
Liability of the parties
| (1) | No separate legal personality |
| An LP is not a separate legal entity from its partners, that is, an LP cannot sue or be sued or own property in its own name. An LP, like a general partnership, does not have a legal personality and thus cannot enter into contracts. An LP cannot become a partner in another partnership, LP or limited liability partnership, or a shareholder in a company. | |
| (2) | The partners |
| A partner's ownership and share in the profits and assets of an LP is purely the subject of agreement between the partners. Subject to the partnership agreement, an LP's property can be held in the name of the general partner.
The general partner bears responsibility for the actions of an LP. The general partner has management control and bears liability for all debts and obligations of the limited partnership incurred while being a general partner in the limited partnership. Like shareholders in a company, a limited partner is not liable for the debts and obligations of an LP beyond that partner's agreed contribution or investment (whether in the form of cash, property, services or otherwise). The general partners pay the limited partners a return on their investment (akin to a dividend), the nature and extent of which is usually defined in the partnership agreement. In this regard, a limited partnership agreement is necessary to spell out the rights and obligations of the general partners and the limited partners. While limited partners enjoy limited liability, they are prohibited from participating in the management of the LP. Limited partners will lose the protection of their limited liability if they participate in the management of the partnership. The limited partner will be personally liable for all debts and obligations of the LP incurred during the period that the limited partner participates in the LP's management, as though he were, for that period, a general partner. The First Schedule of the LPA prescribes a list of activities that, for the purposes of the LPA, are not regarded as taking part in the management of the partnership. These include contracting with the partnership, acting as an employee of the partnership, providing advice in relation to the business affairs or transactions of the partnership, and calling, attending or participating in a meeting of the partners or limited partners. Therefore, partners can separately enter consultancy agreements with the LP to provide advice on proposed investments by the LP. In this regard, limited partners have to refrain from active participation in the business or engaging in management activity if they wish to avoid unlimited liability status but they can enter independent contracts with the general partner. |
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| (3) | The manager |
| The local manager is personally responsible for the discharge of all obligations attaching to the LP under several provisions of the LPA. In the case of any default in respect of any such obligation, the local manager will be subject to the same responsibilities, liabilities and penalties as a general partner in the LP. |
Other requirements
| (1) | Securities and Futures Act |
| The Securities and Futures Act provides that the definition of securities includes 'interests in a limited partnership... formed in Singapore'. In that regard, a person can make offers to the public in Singapore to buy or subscribe for interests in limited partnerships in accordance with Division 1, Part XIII of the Securities and Futures Act (that is, issuing a prospectus). In that regard, an LP can be a vehicle for raising capital in Singapore. | |
| (2) | Income Tax Act |
| The Income Tax Act does not subject limited partnerships to corporate income taxation. Profits are instead taxed at the partner’s personal income tax rates. |
Dissolving the limited partnership
Subject to the partnership agreement, the general partner may dissolve the LP. Alternatively, if registration has expired and has not been renewed, ACRA can dissolve the LP.
Conclusion
The requirements indicate that the LP is a hybrid between a company (where limited partners have limited liability similar to shareholders) and a sole proprietorship (where the general partner has unlimited liability, enters contracts and can hold property). The LP provides a structure for passive investors who prefer to contribute money or resources rather than operate or manage the partnership and wish to allow an experienced party (such as a fund manager) to manage the partnership (albeit with unlimited liability). Furthermore, due to the limited liability of limited partners, the LP can be used as a vehicle for raising capital. However, it is crucial to note the requirements that the LP is renewed annually and that limited partners refrain from taking control (or being seen to be taking control) of the business of the LP if unlimited liability is to be avoided.
