Limited partnerships – unlimited potential?
In 2008, New Zealand established a new business vehicle, the limited partnership. Limited partnerships were introduced to assist with the growth of New Zealand’s investment capital sectors such as venture capital. Their creation reflected the fact that existing investment vehicles, most notably the special partnership, were not fit for that purpose.
It is fair to say that limited partnerships have been popular, with approximately 2000 registered with the Companies Office by late 2015. So why have limited partnerships been so popular? The answer lies in their particular and useful combination of characteristics.
Separate legal entity status
A limited partnership is a separate legal entity under New Zealand law. It is created by registration through the Companies Office and can exist for an indefinite period of time provided that it complies with certain legislative rules. Registration requires at least one general partner, one limited partner, and a written limited partnership agreement.
Having a separate legal personality means that the limited partnership is able to enter into transactions in its own right (i.e. as principal). This makes it more likely that in the case of a dispute, the limited partnership, rather than the underlying limited partners, will be treated as the liable party.
Limited liability for limited partners (with qualifications)
The limited partners in a limited partnership have limited liability which they can only lose if they participate in the management of the limited partnership.
There is no comprehensive definition of “management” in the legislation, but various safe harbour activities are listed that a limited partner can undertake without risking their limited liability status.
This gives investors certainty about what they can and cannot do without compromising their limited liability status.
Flow-through tax treatment
Limited partnerships are fiscally transparent for New Zealand tax purposes. This means that the limited partnership itself is not taxed. Instead, the income and expenditure of the limited partnership flow through to each partner, in proportion to that partner’s partnership share in the limited partnership.
Flow-through tax treatment ensures that each partner pays tax in relation to their share of the limited partnership’s income, in accordance with that partner’s tax attributes under New Zealand law. This allows for different limited partners to be taxed differently with respect to their limited partnership investment.
In the event that the limited partnership makes tax losses, as is common in start-up businesses, those losses will also flow through to each partner and may be offset against their income from other sources, subject to rules that prevent losses flowing through in some circumstances.
One of the significant problems with the old special partnerships regime was that the rules were antiquated and lacked a number of the features preferred by foreign venture capital investors.
The limited partnership regime was designed with the express intention of appealing to foreign investors and therefore New Zealand limited partnerships were designed to have all of the features commonly seen in limited partnership vehicles used throughout the world. While no two limited partnership regimes are identical, international investors can be comfortable that a New Zealand limited partnership entity works in broadly the same manner as other limited partnership vehicles.
New Zealand’s limited partnership regime has been a success, as can be seen by their uptake and use. The benefits that limited partnerships offer make them attractive not only for overseas investors looking at investing into New Zealand, for which they were designed, but for domestic investors as well. In addition, there may well be scope for new and innovative uses for limited partnerships in New Zealand.
Jeremy Muir and Andrew Ryan are Partners at Minter Ellison Rudd Watts. Mr Muir specialises in financial services and investment and Mr Ryan is a tax specialist.