The Limits of a Limited liability Partnership
The Limits of a Limited liability Partnership
Many companies, mainly in the Internet and various technologies, operate through the classic and common structure that combines a limited company with a limited partnership, in which the majority of the participation units are allocated to the limited partners, who benefit from the limited liability principle on the one hand, Which is applicable to partnership, on the other hand, since according to the law, a limited partnership must include at least one general partner, the limited partners at the front constitute a single general partner, a limited company whose shareholders are the limited partners. The general partner is allocated a small part of the participation units, and in effect, the limited partnership protects each unit from exposure to unlimited liability, while channeling most of its profits to the limited partners, which are taxed as individuals.
As is known, a partner engine is limited to participating in the management of the partnership's business (section 63 (a) of the Partnerships Ordinance). This prevention is sometimes a real Achilles' heel, since in the structure in question, the limited partners are the dominant partners, and naturally they are interested in institutionalizing the corporation. The usual way to deal with this difficulty is by appointing the limited partners, or some of them, to the board of directors of the general partner (which is, as mentioned, Company Ltd.), thereby giving them the de facto management of the limited partnership.
The first risk is that it is not clear whether, in light of the wording of Section 57 (b) of the Partnerships Ordinance, a limited company can serve as a general partner, which states that "a corporation may be a limited partner" The rationale underlying this interpretation is the intention to prevent a situation in which the general partner who holds the partnership's management board will hide behind the limited liability framework of the company. In practice, the problematic nature of the interpretation of this section 57 (b) above is purely theoretical, since in practice, as far as I know, the Registrar of Partnerships agrees to register corporations, including limited companies, as general partners.
The second risk, and more problematic, is the fear of raising the scope of incorporation of the company (the general partner) and attributing the management of the partnership's business to the limited partners, who serve as the company's managers personally. Under Section 63 (c) of the Partnerships Ordinance, a limited partner who participates in the management of the partnership's business is responsible for all its obligations, as if it were a general partner, as long as it participates in its management. Such a scenario could be disastrous for the limited partners, in the event that they believed that the structure in question provided them with protections from exposure to unlimited liability, similar to the protections granted to shareholders and directors of the Company Ltd. Of course, the risk of lifting such a screen is uncertain, It is sufficient to weigh the advantages and disadvantages of this form of association in the balance sheet, and it requires the founders to consider the weight of the tax advantages inherent in the limited partnership, against the risk of denying responsibility Limited.
The fear of the removal of limited liability is reduced in cases where there is no absolute identity between the managers of the general partner and the limited partners. For example, the appointment of external directors in the general partner in such a way that the sole relationship of the partners to the general partner will be a holding of shares reduces, to a certain extent, the concern that the management of the partnership's business will be attributed to the limited partners themselves.
This concern is further reduced, where the limited partners themselves are limited companies, in which case a double curtain will be required to charge the shareholders of those companies with personal responsibility for the limited partnership's obligations. There is no concern at all of raising such a screen, but on the other hand, such a structure deprives the limited partners of any possibility of influencing the management of the partnership.
In light of the above, relevant companies are proposed to consider the possibility of replacing the general partner managers in the affiliated companies with limited and incorporated partners as companies.
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