Foreword
Limited partnership has within the last few years become more and
more popular, and because of the nature of a limited partnership,
and its many possibilities, makes this issue needles to say very
important to mention, especially for those of who are thinking
establish a limited partnership
Limited Partnerships
Nature of a partnership
A partnership is a type of business entity which is usually formed
when two or more person which to carry on a business together with
the view to making a profit. Although the same reason could exist
for establishing a company, the individuals concerned will have
decided that the features and benefits of a partnership structure
would best suit their needs.
Types of Partnerships
There are essentially two types of partnerships:
General partnerships
These are perhaps the most commonly used type of partnership and are
popular mainly in onshore jurisdictions. Each partner will be
involved with the day-to-day running of the firm and each ill be
responsible of the actions of the others. The partners will all be
personally liable of the debts of the partnership without limit.
Limited partnerships
This type of partnership is becoming increasingly popular in
offshore centres. They can be structured with two types o partners,
namely:
a) Limited Partners who take a
passive role in the firm and their liability is limited to such
amounts as are set out in the partnership deed (which will usually
be the amount they contributed to the partnership funds); and
b) General Partners who will be the
partners who manage the firm and whose liability will be unlimited.
General partners are often referred to as managing partners.
The Structure and Possible
Taxation Benefits of Offshore Limited Partnerships
Generally speaking, a partnership is not assessed to tax but instead
it is the individual partners who will but issued with assessment in
respect of their shares of the income and profits of the
partnership. A partnership is therefore transparent for tax
purposes; it does exist as a taxable entity as the liabilities and
profits would be attached to the individual partners.
A number of offshore centres (such
as Jersey, the Isle of Man, and the Cayman Isles) have introduced
legislation which allows a partnership to be formed which can be
comprised of limited partners as well as general partners. The
limited partners would not be involved in the day-to-day business of
the partnership and may be non-resident individual, non-resident
companies, international companies (or whatever the local equivalent
may be), or a combination of nay of the aforementioned.
The general partner will often be a
locally incorporated resident company which has a resident director
(and in some cases a suitably qualified company secretary). In those
centres which impose taxation on corporate entities, it would be
usual for such a company to be permitted to apply for tax-exempt
status (or the equivalent tax status in the offshore centre
concerned.
A limited partnership would usually
be treated as a separate entity for tax purposes and in those
centres which have corporation tax, would be able to pay a nominal
fee to the local tax authority or relevant government authority in
exchange for local tax exemption. In some centres this fee can be as
little as $500.- per annum. In centres which impose no direct
taxation, an annual 'registration' fee would be payable instead.
Partners of locally established
limited partnerships would not be assessed to local tax on their
share of the profits and in addition, no withholding taxes would be
payable on distributions made to non-resident tax.
The limited partnership would not
normally be permitted to carry on certain prescribed activities in
the offshore centre, which would cover such activities as
manufacturing and undertaking banking or investment business.
Not all offshore centres have
specific legislation which covers the use of limited partnerships as
international planning vehicles although the number of centres which
do allow such entities is growing.
Formation of Limited Partnerships
Although the formation procedure will vary between centres, (Victrola
Independent kindly recommends the reader to seek more advice with
regards to any specific centre)the following is a list of
the usual paperwork which is required to be lodged with the
Registrar of Companies (or similar department) to create a limited
partnership in those offshore centres which permit this type of
vehicle;
a) A copy of the partnership deed
b) Confirmation of the name of the
partnership and the intended location of its
registered address (which most be in the offshore centre concerned)
c) The full names and addresses of
the general partners :
d) The full names and addresses of
the limited partners:
e) Details of the contributions
which are to be made by the limited partners:
f) A declaration that the partnership will not conduct business
locally in the offshore centre where it is registered.
The paperwork must also be
accompanied by the required filing fee, the amount of which will
again vary between centres.
Annual Requirements
Usually, a limited partnership must file an annual return with the
Registrar (or equivalent)
which contains the same type of information that is required on
registration, plus a declaration that the partnership has not
undertaken business locally. There will also be an annual fee (as
previous mentioned).
Limited Partnerships as
Investment Vehicles
A limited partnership can be used as a vehicle for collective
investment schemes in much the same way as a unit trust or an
open-ended investment company.
The investors would become the
limited partners (rather than shareholders) and the manager of the
scheme would be the general partner. The limited partners would
share in the profits (or losses) of the scheme whilst the general
partner would receive a fee for managing the funds.
The tax transparency of the
partnership, which would result in any realised gains or losses
being treated as the gains or losses of the limited partners, would
also create further planning opportunities. For example, the
partnership could be used as an 'investment' vehicle by a group of
international corporate investors wishing to 'pool' their exposure
to high risk investments (such as venture capital schemes or
derivatives). By using a tax efficient offshore vehicle in such
manner it could allow them to offset any realised gains or losses
against other gains or losses against other gains or losses made as
a result of their other business activities.
Another feature which would appeal
to those wishing to use a limited partnership as an investment
vehicle is the fact that there is no limit imposed on the number of
partners.
Limited Partnerships as Asset
Protection Vehicles
A number of advisors, particularly those in the USA, have marketed
the limited partnership as an asset protection vehicle. This has
proved to be popular with those clients who are unfamiliar with, or
dislike, the common law trust concept.
Usually, the structure comprises an
offshore trust which receives assets from the client, the trustees
than enter into a limited partnership whose general partner will be
a company which is beneficially owned or otherwise controlled by the
client. The clients are therefore able to exercise some control over
the assets in the structure. However, one of the potential problems
which this sort of arrangement could create is the fact that the
client could undermine the possible benefits.
Limited Partnerships as a Type of
Trust
Finally, offshore limited partnerships can also be used as a type of
trust, employing a structure which is similar to the way limited
partnerships can be used as an investment fund. Asset would be
transferred into the partnership and the limited partners would
receive a share of the profits. They would be the 'beneficiaries' of
the structure. The general partner would control the timing of the
distributions and he would also manage the assets. He would
therefore be the 'trustee'.
Limited liability Partnerships
On behalf of the reader and for ease of reference, Victrola
Independent would briefly mention a variation of this type of
vehicle known as a liability Partnership (LLP)
Although an LLP retains many of the
features of a traditional limited partnership, liability is
restricted to the assets of the partnership and the individual
partners will not be personally liable for any for the debts of the
LLP.
Such a vehicle can create advantages
for partners in law firms and in the accountancy profession. It
remains to be seen whether the limited liability aspect will receive
widespread acceptance from the regulators of such profession
In the Channels Islands and the
island of Jersey is and example of an offshore centre which offers
LLP.s
