Exempted limited partnerships are suitable business structures in Bermuda for a variety of different business purposes.

They often serve as a vehicle for investment funds, particularly for venture capital/private equity transactions and, in this regard, it is possible to list the interests in an exempted limited partnership on various internationally recognised stock exchanges including the Bermuda Stock Exchange.

An exempted limited partnership may also be an attractive structure for various tax planning purposes, for example, as a method of holding assets situated in another jurisdiction.

Such a structure can also provide an attractive method of trading as a partnership where it is desirable to have the flexibility to introduce partners as passive investors on a limited liability basis.

In all cases, whatever the purpose, an exempted limited partnership is a partnership in respect of which a certificate of exempted partnership and certificate of limited partnership is registered and where at least one partner does not possess Bermudian status under the provisions of the Bermuda Immigration and Protection Act 1956.

Bermuda partnership law largely follows English partnership law. Both general and limited partnerships may operate as unincorporated entities constituted by the contractual relationship between the partners or they may elect to have ‘legal personality’ upon formation. A partnership that makes such an election is a legal person separate from its partners. Once made, the election of legal personality is irrevocable. Whether a partnership has elected to have separate legal personality or not, a partnership may carry on business in its own name and may sue and be sued in the partnership name.

As exempted undertakings, such partnerships are subject to restrictions on the business activities that they may conduct in Bermuda. These restrictions preclude such partnerships from engaging in retail trade and from owning land in Bermuda (except by way of a tenancy agreement or lease of business premises for a term not exceeding 50 years).

These restrictions do not preclude exempted limited partnerships from effecting or concluding contracts in Bermuda, or holding meetings in Bermuda. They are not prevented from:

• Exercising all other powers necessary for carrying on their business with persons outside Bermuda;

• Doing business in Bermuda with other exempted undertakings in furtherance of their business conducted outside Bermuda; and

• Transacting banking business in Bermuda or (if the partnership agreement expressly provides) acting as manager or agent for, or consultant or adviser to, the business of another exempted undertaking.

The management of a partnership’s business and affairs is arranged by and subject to the provisions of the partnership agreement. However, in the case of an exempted limited partnership, only the general partners may manage the business of the partnership.

Limited partners are viewed as passive investors who contribute capital in order that the business may be carried on with a view to generating and maximising profits only. As such, limited partners generally obtain the benefit of limited liability to the extent of their interest in the partnership.

In order to obtain and maintain the benefit of limited liability in relation to any debts incurred and obligations of the exempted limited partnership, limited partners must not take part in the management or conduct of the business.

If a limited partner participates in management, he may become liable as a general partner for the debts and obligations of the partnership. There are a number of activities, however, that do not constitute ‘management’, including, advising a general partner on the business of the partnership and taking any action or making any decisions in respect of any investment made by a limited partnership.

If a limited partner takes part in the conduct of the business (for any period), the limited partner will generally be liable for all debts incurred and obligations of the exempted limited partnership in relation to that period.

However, a limited partner will not be regarded as being involved in the conduct of the business in certain circumstances, including, but not limited to:

• Being a contractor, agent or employee of the exempted limited partnership or the general partner;

• Being a director, officer or shareholder of a corporate general partner; or

• Acting as a surety or guarantor for the exempted limited partnership.

Accordingly, both general partners and limited partners of an exempted partnership should exercise caution as, in broad terms, the liability of a general partner of a limited partnership is unlimited and the liability of a limited partner is limited to the value of the money and/or the value of any property that the limited partner undertakes to contribute to the partnership, provided a limited partner does not engage in the conduct — or, indeed, the management — of the business.

Lawyer Seth Darrell is an Associate and a member of the Corporate and Commercial Practice Group at Appleby. A copy of this column can be found on the Appleby website at www.applebyglobal.com.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.