Incorporated Limited Partnerships: An Explainer

Choosing the right business structure plays a significant role in starting a business. Each structure has different legal costs, operational risks and tax implications associated with it. Most start-ups and small business begin their journey with a significant amount of investment in a high-risk environment. In such scenarios, an incorporated limited partnership might be better suited for your needs. This guide discusses this business structure in detail.

Table of Contents

Partnership

A partnership is a business structure made of two or more people who carry out business with the intention of making a profit. A general partnership would ensure all partners are equally responsible for the business. This also imposes unlimited liability on the partners for any debts incurred by the business. The partners are also liable for the actions of each other.

Incorporated Limited Partnership

An incorporated limited partnership is a particular type of partnership that caters to people engaged in high-risk ventures. This type of partnership separates the business entity from its partners. However, an Incorporated Limited Partnership must have at least one general partner (but not more than twenty) with unlimited liability. This means if the business venture cannot fulfil its obligations, the general partner will be personally held liable. 

Incorporated limited partnerships in New South Wales fall under the Partnership Act 1892 (NSW). Under this statute, an incorporated limited partnership must have written partnership agreement that clearly outlines the rights and responsibilities of each partner in regards to the partnership. Incorporated limited partnerships are also obliged to register with the appropriate agency in the state they have been incorporated. For instance, the Department of Fair Trading if the partnership is in New South Wales. You also need to register your incorporated limited partnership under the Venture Capital Act 2002 (Cth) to be eligible for the same tax benefits a normal partnership receives. Your business name must also be accompanied by the words ‘ILP’ to indicate the type of partnership behind the business.

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When to Form an Incorporated Limited Partnership

Venture capital investments in Australia tend to use an incorporated limited partnership as a business structure. This is because this business structure would encourage venture capital investments as well as facilitate growth and innovation in Australia. To register as an incorporated limited partnership, you have to fall under the following classifications:

  • Venture Capital Limited Partnership (VCLP) – This partnership offers foreign investors an exemption from Capital Gains Tax for any gains made on eligible investments in Australia. You require at least $10 million committed capital and a partnership that will exist for between 5 and 15 years.
  • Early Stage Venture Capital Limited Partnership (ESVCLP) – ESVCLP aims to improve the early venture capital sector in Australia by granting fund managers and investors with tax benefits. For instance, an investor can get a tax exemption on his share of a fund’s income or gains. 
  • Australian Venture Capital Fund of Funds (AFOF) – A registered AFOF encourages investment in a portfolio of registered VCLPs and ESVCLPs by providing tax incentives and flexibility for the investors. 
  • Venture Capital Management Partnership (VCMP) – VCMP is a general partner of one or more of the above categories. These partners are solely involved in management. 
  • You intend to be any of the above.  

Venture capital refers to the financial assistance investors offer to start-up companies and small businesses with long term growth prospects. This investment carries a lot of risks as the business is still in the early stages of development and has a greater chance of failure. 

Managing Incorporated Limited Partnerships

While general partners have unlimited liability, limited partners in the incorporated limited partnership have limited liability for debts and limited obligations within the partnership. Hence, only general partners can take part in managing the business. A limited partnership owes no fiduciary obligations to other partners. This essentially means the partner does not owe a duty to other partners or the business. Unlike a general partnership, an incorporated limited partnership is a separate entity under the law. This reduces the level of managerial and financial risks for limited partners of the partnership. 

If you have any questions or need assistance to choose the best business structure for your business, you should seek advice from one of our business lawyers.

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