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What It Means To Hold A Partnership Interest

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What It Means To Hold A Partnership InterestThe key to any successful relationship is clear mutual understanding. Business relationships, such as partnership relationships are no different.

Each partner must fully understand the implications of entering the partnership and their interest in the relationship. For business partnerships, the benefits, rights and liabilities conferred upon each partner are referred to as their ‘partnership interest’.

What Is A Partnership Interest?

The Limited Partnerships Act 2008 in New Zealand defines the partnership interest of a partner as that partner’s:

  • Share of the assets of the limited partnership;

  • Right to receive distributions from the limited partnership;

  • Right to any other benefit conferred by the partnership agreement; and

  • Includes any liability or other burden of the partner in relation to the limited partnership.

Terms Of The Partnership

The rights and liabilities conferred upon the holder of a partnership interest may vary according to the terms agreed in a private written Partnership Agreement.

Determining A Partnership Interest

Typically, a partnership interest is represented by a percentage pro rata to the capital contribution made by that partner. For instance, where a partner makes a capital contribution of 50%, they hold a 50% partnership interest.

Allocation Of Income, Capital & Losses

The terms of a typical partnership agreement will stipulate that all income, capital and losses are allocated to the partners in accordance with their partnership interest.

Alternatively, the partners can agree that distributions may be made in different proportions or that distributions may even be made to a partner who has not made any capital contribution at all.

In each case, the partnership agreement should clearly set out the manner in which the distributions are to be made.

Fiscal Transparency 

Partnership structures are generally treated as fiscally transparent for income tax purposes. Tax authorities will attribute the activities of the partnership to the underlying partners in proportion to their partnership interest.

Income, expenses, tax credits, rebates, gains and losses are allowed to flow through to partners and are generally allocated to the partners in proportion to each partner's share in the partnership's income. Therefore, the limited partnership itself will not be taxed. Instead, partners will be taxed individually.

Ownership Of Property

Any property held in the name of the limited partnership partners is treated as being held directly by the partners in proportion to their partnership interests. Partners will be treated as doing, having, or being party to these things and the partnership will not. The partnership itself is not treated as holding the property.

Partnership Share In Different Assets

The proportionate approach does not, however, prevent a partner from having different proportions of shares in different types of partnership property. This allows, for example, for a partner's share in the income from a certain asset to be different from that partner's share in other assets for income tax purposes.

Liability Protection & Different Types Of Partnership

When choosing the type of partnership structure for a specific client, careful consideration should be given to the different liability protection provided by a Limited Partnership (“LP”) and Limited Liability Partnership (“LLP”).

In typical modern LP structures such as the New Zealand LP, UK LP and Scottish LP, the limited partner is treated as a passive investor and enjoys liability protection, provided the limited partner does make important decisions regarding the company or manage its operations. The general partner does not enjoy this limited liability.

An LLP, on the other hand, provides liability protection to all partners. Popular LLP structures include the UK LLP and Canadian LLP.

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