Chapter 35 Limited Partnerships and Special Partnerships

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Limited Partnership Two types of partners: General partners: invest capital, manage the business, and are personally liable for partnership debts Limited partners: invest capital, but do not participate in management and are not personally liable for partnership debts beyond their capital contributions 35-2 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Limited Partnership At least one general partner and one limited partner No restrictions on maximum number of general or limited partners Any person may be a general or limited partner A person may be both a general and limited partner 35-3 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Revised Uniform Limited Partnership Act (RULPA) Modern, comprehensive law for the formation, operation, and dissolution of limited partnerships Supersedes the Uniform Limited Partnership Act (ULPA) Provides basic foundation for limited partnership law 35-4 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Certificate of Limited Partnership Document executed and signed by two or more persons that makes a limited partnership legal and binding Contents of the certificate: Name of address and each partner Name, character, and place of business Amount of cash, property, or services Latest date of dissolution 35-5 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Foreign Limited Partnership Limited partnership in all other states besides the one in which it was formed Law of the state governs its organization, internal affairs, and partners’ liabilities For business transactions, a certificate of registration is required 35-6 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Name of Limited Partnership Name may not include surname of limited partner unless: It is also surname of general partner Business was carried on under that name before admission of limited partner Other restrictions: Should not be the name of other corporations Name must contain the words, “limited partnership” 35-7 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Capital Contributions Contribution may be in cash, property, services rendered, or promissory notes or other obligations to contribute cash, property, or to perform services Partner or creditor may bring lawsuit to enforce promise to make contribution 35-8 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Defective Formation Occurs when: Certificate not properly filed, Defects in certificate that is filed Other statutory requirement for creation of limited partnership is not met In case of such defects, limited partners may be liable as general partners Can escape liability by filing certificate of amendment or certificate of withdrawal 35-9 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Limited Partnership Agreement Document that sets forth the rights and duties of general and limited partners Terms and conditions regarding operation, termination, and dissolution of partnership Approval of transactions by partners 35-10 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Share of Profits and Losses Agreement may specify how profits and losses are to be allocated among the general and limited partners If not specified, RULPA provides that profits and losses are shared on the basis of value of the partner’s capital contribution 35-11 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Right to Information Each limited partner has right to obtain full information regarding state of business, finances, etc. Partnership must keep the following records: Certificate and all amendments Full names and addresses of each partner Written limited partnership agreements All income tax returns Three years of financial statements 35-12 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Admission of a New Partner New limited partner can be added only upon the written consent of all partners Agreement can provide otherwise New general partner can be admitted only upon written consent of each partner Agreement cannot vary this requirement Admission effective after amendment is filed 35-13 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Liability of General and Limited Partners General partners have unlimited liability for debts and obligations of the partnership Limited partners are liable only up to their capital contributions Creditor may enforce personal guarantee and recover payment from limited partner who guaranteed repayment of loan 35-14 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Participation in Management General partners have management rights Limited partners give up these rights in exchange for limited liability Liable as general partner if participation is substantially the same Only liable to persons who reasonably believe them to be general partners 35-15 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Permissible Activities of Limited Partners Being an agent, employee, or contractor of the partnership Acting as surety for the partnership Being a consultant or advisor to a general partner regarding the limited partnership Voting on amendments to partnership agreement Voting on other partnership matters, including dissolution, removal of general partner, etc. 35-16 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Summary: Liability of Limited Partners General Rule Limited partners are not individually liable for the obligations or conduct of the partnership beyond the amount of their capital contribution Exceptions to the General Rule Limited partners are individually liable for the debt, obligations, and tortious acts of the partnership in three situations: 1. Defective Formation 2. Participation in Management 3. Personal Guarantee 35-17 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Dissolution of a Limited Partnership Certificate of cancellation must be filed upon dissolution of limited partnership Causes of dissolution: End of life of limited partnership Written consent of general and limited partners Withdrawal of general partner Entry of decree of judicial dissolution 35-18 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Winding Up of a Limited Partnership Partnership must wind up its affairs upon dissolution Affairs may be wound up by general or limited partners Partner may petition the court to wind up the affairs 35-19

Distribution of Assets After the assets of the limited partnership have been liquidated, proceeds must be distributed Order of distribution of partnership assets: Creditors of the limited partnership Partners with respect to Unpaid distributions Capital contributions The remainder of the proceeds 35-20 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Limited Liability Limited Partnership (LLLP) Organized under state law by filing articles of LLLP with the secretary of state’s office General and limited partners have limited liability They are not personally responsible for debts of the LLLP 35-21 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Liability of General and Limited Partners of an LLLP Debt or obligation owed Limited Partnership Third Party Capital investment General Partner General Partner Limited Partner Limited Partner Liability limited to capital contribution No personal liability for partnership’s debts and obligations Personal liability for partnership’s debts and obligations 35-22 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 35-23 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.