What is the primary advantage of being a limited partner instead of a general partner

26 Aug 20

Limited partnerships have been in New Zealand for over a decade. More and more they offer advantages over a company in some situations.

The nature of limited partnerships
Limited partnerships are essentially incorporated partnerships. There is a lot of flexibility (and relatively few rules) about how you structure them. This is a major strength of the limited partnership, but it does have a down-side. The limited partnership agreement is a combination of an old-fashioned partnership agreement and a company constitution. There is no such thing as a “standard” agreement, which means they are more expensive than a company to incorporate. The other unusual thing about a limited partnership is that it does not have a board. Instead, it must be managed by a “general partner”. Practically, the role of the general partner is a slightly unusual mixture of a board and a manager. The general partner is almost always a company. The company has a board. In reality (but not legally), the directors of the general partner are the “board” of the limited partnership.

Tax implications
In many ways a limited partnership is treated like a partnership for tax. Profits and losses usually flow directly to the partners, in the way the limited partnership agreement sets out. This means that tax is assessed to the partners, not to the partnership itself. It is often very useful in an entity that makes losses early on. It means that partners may be able to offset the tax effect of the losses against other income. This is also particularly relevant with entities that span foreign jurisdictions because it can avoid double taxation. For example, if an Australian company is taxed in Australia, then pays a dividend to a New Zealand shareholder, the shareholder is taxed on the dividend in New Zealand. But Australian tax credits for tax paid in Australia (the equivalent of imputation credits) are not available to the New Zealand shareholder. So the shareholder is taxed twice. A limited partnership avoids the double tax because the partnership is usually not taxed in Australia. So there is no tax credit to lose, and no double taxation.

Flexibility in profit allocations
Companies tend to be very rigid in how profits are allocated to shareholders, because of the nature of dividends. Limited partnerships can offer much more flexibility, like traditional partnerships. Within reason, you can agree how the profit will be distributed. This can be very helpful in the perennial primary industry challenge – inter-generational succession planning.

Limited liability
A limited partnership has a very big advantage over a partnership, because the partners, other than the general partner, have limited liability to the outside world. This means that a limited partnership has most of the flexibility and tax advantages of an old fashioned partnership, with the added advantage of limited liability, like a company.

Advantages
So, a limited partnership has several possible advantages over a company:

1.  No double tax on income crossing borders
2.  The ability of partners to more easily utilise losses
3. More flexibility in moving profits/losses between partners
4. More flexibility, generally

How relevant is this to the primary sector?
Limited partnerships are probably more useful in the primary sector than in many others due to the benefits of the first three of those advantages listed.

Please feel free to talk to Anderson Lloyd about whether a limited partnership might be the right fit for you.

For other Rural and Agribusiness news, see our latest edition of Rural.