An incorporated limited partnership (ILP) is a type of partnership structured around the traditional model with some important differences. Below, we discuss ILP structures – what they are, the legislation with which they must comply and their use in Australia.
Partnerships: A Refresher
A partnership is a common business structure that involves two or more persons carrying on business with the intent to make a profit. The defining characteristics of a partnership include the unlimited liability of partners for the debts of the business and the fact that a partner is joint and severally liable for the actions of another. Partners also share in the profits or loss of the business, either equally or per the partnership agreement. Importantly, a partnership is not a separate legal entity.
What is an Incorporated Limited Partnership?
On the other hand, partners in an ILP can have limited liability for the debts of the business (also know as limited partners). An ILP, however, must typically have at least one general partner with unlimited liability. If the business cannot meet its obligations, the general partner (or partners) become personally liable for the shortfall.
Management in an ILP
As limited partners have limited liability, they cannot take part in managing the business. Only general partners can do so. Further, the actions of a limited partner cannot bind the partnership, other limited partners or the general partners, unless expressly permitted in the partnership agreement. A limited partner also does not have fiduciary obligations towards other partners. Significantly, an ILP is an incorporated entity. As such, it is a separate corporation with a general seal. Like all companies, it has perpetual succession and can sue or be sued in its own name.
What Legislation Governs ILPs?
All ILPs must comply with state and territory legislation concerning partnerships. For example, in New South Wales the applicable statute is the Partnership Act 1892 (NSW). ILPs must have a written partnership agreement clearly delineating the rights and duties of each partner vis-à-vis the partnership. This agreement has the effect of a contract between the partners and the partnership. ILPs can typically have an unlimited number of limited partners but only a fixed number of general partners. For example, in NSW ILPs can have only twenty general partners. ILPs must register with appropriate state or territory government agencies (in NSW, this body is the Department of Fair Trading). They must also use ILP in their name to denote the fact that this is a limited partnership.
Use in Australia
In Australia, ILPs are used to structure venture capital investments. This function is made possible by the federal Venture Capital Act 2002 (Cth) and corresponding state and territory legislation. Regulators perceived that ILP as a business structure would facilitate and encourage this kind of investment as well as growth and innovation. ILPs also receive concessional tax treatment. There are four types of ILP set out below and an ILP must meet the criteria for each category to register:
- Venture Capital Limited Partnership (VCLP)
- Early-stage Venture Capital Limited Partnership (ESCVLP)
- Australian Venture Capital Fund of Funds (AFOF)
- Venture Capital Management Partnership (VCMP)
Each of these kinds of ILPs has a slightly different function. A VCLP invests in companies directly. An ESCVLP invests in eligible entities with assets of no more than $50 million (before investment). AFOFs can invest indirectly, through a VCLP or ESCVLP, or directly subject to certain requirements. A VCMP can only manage these other kinds of ILPs.
If you have any questions or need assistance setting up your ILP, get in touch with our business structuring lawyers on 1300 544 755 or fill out the form on this page.