Chapter 4 Limited Partnership

An Introduction to Limited Partnerships Limited partnership-a partnership formed by general partners and limited partners General partners-run the business and have liability Limited partners-partly or fully finance the business, take no part in running the business, and have no liability for partnership debt beyond the money they put in or promise to put in Limited liability limited partnership-a type of limited partnership in which the general partners have less than full liability for the actions of other general partners.

Uniform Limited Partnership Act of 1916 (ULPA) –first uniform law concerning limited partnerships in the U.S. Revised Uniform Limited Partnership Act of 1976 1985 amendments to the Act O.C.G.A. Chapter 14-9

The limited partnership is treated as a separate entity with regards to real estate ownership and capacity to sue. ULPA §104 (2001) Exceptions: when dealing with substantive liabilities and duties of the partners In these instances the partnership is considered an aggregate of the individual partners.

IRS treatment Required to file partnership income returns not subject to federal income taxation as separate entities

Partners’ Rights and Responsibilities General partner rights and responsibilities *except as otherwise provided by statute or limited partnership agreement Same as a partner in a general partnership (refer to Chapter 3 slides)

Limited partner rights and responsibilities Limited liability Risk is limited to amount of that partner’s investment in the LP Creditors of the LP may not look to the personal assets of the limited partner when trying to collect on a debt owed by the LP Limited partner holds no title to the assets of the partnership

No right to participate in management RULPA §303(a) provides: a limited partner who participates in control of the business is liable only to persons who transact business with the limited partnership reasonably believing, based upon the limited partner’s conduct, that the limited partner is a general partner

Terms of art “taking part in control Defined by case law of the jurisdiction “safe harbor” activities –RULPA §303(b) See also page 118

ULPA of 2001 Limited partners are not personally liable for obligations of the LP “even if the limited partner participates in the management and control of the LP”

Statutory rights of limited partners Right to info regarding the partnership business Inspect records/books Agreement rights of limited partners Right to vote on certain extraordinary matters affecting the LP

Relationship b/w general partners and limited partners Owe fiduciary duty to limited partners A person may be a general partner and a limited partner

Advantages of Doing Business as a LP Limited liability for limited partners See Commonwealth of Pennsylvania, Department of Revenue for the Bureau of Accounts Settlement v. McKelvey Income tax benefits Not taxed as separate entity Subject to IRS limits regarding losses

Transferability of partnership interest Limited partner’s interest is assignable Assignment does not cause a dissolution of the LP An assignment is the transfer of one’s rights under a contract. The assignor is the one who assigns or transfers his/her right to receive payment to the assignee (the person to whom a transfer or assignment is made).

Business continuity Limited partner’s death or incompetency does not dissolve the LP Legal representative of the deceased or incompetent limited partner will exercise the partner’s rights LP does not dissolve upon death or withdrawal of general partner There is at least one other general partner

Diversified capital resources The written provisions of the partnership agreement permit the business of the limited partnership to be carried on by the remaining general partner and That partner does so Diversified capital resources LP has ability to raise cash by attracting passive investors Can add new limited partners

Disadvantages of Doing Business as a LP Unlimited liability General partner has unlimited liability for debts and obligations of the LP. Prohibition on control of business In RULPA states, the limited partners must relinquish all control over partnership matters in order to maintain their status and enjoy limited liability.

Formalities and regulatory and reporting requirements Created according to state statute Secretary of state’s office LP certification Legal and organizational expenses Preparation of partnership agreement and certificate Filing fees for certificate of LP

Filing certificate of assumed name

Organization and Management of a LP Management and Control In RULPA states, the general partners of the LP have control of the LP business LP certificate Document filed with SOS to form the LP See elements of LP certificate for states that have adopted the RULPA.

Amendment to LP certificate Certain events necessitate the filing of an amendment to LP certificate Records Required by Statute See page 128 for records required See page 128-129 for information that is set forth in the documents

LPA See pages 129-136 for sample clauses used in the agreement. The agreement goes into more detail than the LP certificate. See Appendix F-2 for a LP agreement form.

Changes in the LP Changes in the LP can affect its continuance. Admission of new general partners RULPA states-general partners admitted with written consent of all partners or by the means set forth in the LPA

Admission of new limited partners RULPA states-limited partners added pursuant to LPA. If not provided for in LPA, then written consent of all partners required. Amendment of the LP certificate is not necessary.

Withdrawal of general partners Generally, death or withdrawal of general partner causes the dissolution of the LP Exception: There is another general partner and the LPA permits the continuance of the LP.

Withdrawal of limited partners LP not dissolved upon the death or withdrawal of a limited. Legal representative can handle the limited partner’s interest.

Financial Structure of a LP Partnership capital contributions RULPA states the contributions must be in the form of a promissory note or other obligation to contribute cash or property or perform services. Limited partnership profits and losses Profits and losses are derived from the contributions and efforts of the partners are shared among the partners

Limited partnership distributions Distributions occur pursuant to LPA. Under RULPA, distributions to partners are forbidden to the extent the fair value of the distributions are made, the partnership liabilities exceed the fair value of the partnership assets.

Income tax reporting Form 1065 Schedule K-1

LP Dissolution, Winding Up, and Termination Once an LP has been dissolved, the partnership does not terminate until the affairs of the LP have been wound up. Causes of Dissolution See page 140 for causes of dissolution under RULPA.

Cancellation of Certificate of LP Filed with SOS Cancellation cert must contain items listed on page 141. Signed by all general partners See Exhibit 4-6

Winding Up Handling those final activities to dissolve the LP Completed by those general partners who have not wrongfully dissolved the LP, if none, then by the limited partners

Settlement and Distribution of Assets State statutes provide the means for distributing the assets. See page 141 for sample list of order of payment Partners will not receive a distribution from the partnership unless the LP’s assets are sufficient to pay all creditors.

Derivative Actions Derivative action-a type of lawsuit brought by a S/H to enforce a claim of the corporation. Derivative actions are not permitted or accepted in all states.

Family LPs Family LP-an LP owned and operated by a family. This type of LP is usually formed by individuals who are concerned about protecting their assets and transferring them to their children with the least amount of income and estate tax liability.

Assets held in a family LP can be protected from claims of creditors. Creditors who have a judgment against a limited partner may seize cash or assets that have been distributed out of the partnership to the limited partner.. Creditors may not take family LP property to fulfill an obligation to them unless the partnership is dissolved.

To reduce estate taxes, a partner can gift shares in the LP equal to the annual gift tax exclusion to each child each year.

The Paralegal’s Role See tasks listed on page 144. Corporate Paralegal Profile on page 146-147. Ethical Consideration on page 147-148.

Resources State statutes IRS SOS Georgia Dept of Revenue Partnership form books