© 2013 Delmar Cengage Learning CHAPTER 4 LIMITED PARTNERSHIPS © 2013 Delmar Cengage Learning

An Introduction to Limited Partnerships LIMITED PARTNERSHIPS DEFINED A limited partnership is a partnership created by statute with one or more general partners and one or more limited partners. A limited partnership is usually treated as a separate entity, especially when dealing with matters such as real estate ownership and the capacity to sue. © 2013 Delmar Cengage Learning

An Introduction to Limited Partnerships LAW GOVERNING LIMITED PARTNERSHIPS State law—usually based on the Revised Uniform Limited Partnership Act with 1985 Amendments (RULPA) or the Uniform Limited Partnership Act (2001) Common law The limited partnership agreement © 2013 Delmar Cengage Learning

Partners’ Rights and Responsibilities General partners’ rights and responsibilities Substantially the same as the rights and responsibilities of those of any partner in a general partnership Limited partners’ rights and responsibilities Right to inspect books of limited partnership Right to vote on extraordinary matters No right to participate in management of limited partnership business (in most states) Rights granted by statute or limited partnership agreement © 2013 Delmar Cengage Learning

Partners’ Rights and Responsibilities THE RELATIONSHIP BETWEEN GENERAL PARTNERS AND LIMITED PARTNERS Because limited partners generally do not have the right to participate in the control and management of the limited partnership, general partners have a fiduciary duty to the limited partners. © 2013 Delmar Cengage Learning

© 2013 Delmar Cengage Learning Advantages and Disadvantages of Doing Business as a Limited Partnership Advantages Disadvantages Limited liability for limited partners Income tax benefits Transferability of partnership interest Business continuity Diversified capital resources Unlimited liability for general partners Prohibition on control of business Formalities, regulatory and reporting requirements Legal and organizational expenses © 2013 Delmar Cengage Learning

Organization and Management of a Limited Partnership MANAGEMENT AND CONTROL Similar to that of a general partnership In states that follow the RULPA, only the general partners of the limited partnership have control of the partnership business. © 2013 Delmar Cengage Learning

Organization and Management of a Limited Partnership LIMITED PARTNERSHIP CERTIFICATE Filed at the state level to form the limited partnership Amendment filed whenever pertinent information in the limited partnership certificate changes State statutes require records and documents be maintained for the inspection of limited partners. Limited Partnership Agreement = entered into by all general and limited partners © 2013 Delmar Cengage Learning

Changes in the Limited Partnership ADMISSION OF NEW GENERAL PARTNERS ADMISSION OF NEW LIMITED PARTNERS In states following the RULPA, general partners may be admitted with the written consent of all partners, or by another means set forth in the limited partnership agreement. Additional limited partners may be admitted pursuant to the limited partnership agreement or by the written consent of all partners. © 2013 Delmar Cengage Learning

WITHDRAWAL OF GENERAL PARTNERS WITHDRAWAL OF LIMITED PARTNERS Changes in the Limited Partnership WITHDRAWAL OF GENERAL PARTNERS WITHDRAWAL OF LIMITED PARTNERS At the time of the withdrawal, there is at least one other general partner, and provisions of the partnership agreement permit the continuance. The limited partnership is not dissolved upon the death or withdrawal of a limited partner. A limited partner may generally withdraw at the time specified in the partnership agreement or in another agreement entered into by the partners © 2013 Delmar Cengage Learning

Financial Structure of a Limited Partnership Partnership capital contributions Limited partnership profits and losses Limited partnership distributions © 2013 Delmar Cengage Learning

Financial Structure of a Limited Partnership LIMITED PARTNERSHIP DISTRIBUTIONS Profits are reinvested in the limited partnership or disbursed to the partners pursuant to the limited partnership agreement. The partnership agreement may provide for mandatory distributions to limited partners or give discretion to the general partners. © 2013 Delmar Cengage Learning

Limited Partnership Dissolution, Winding Up, and Termination As with the general partnership, once a limited partnership has been dissolved, the partnership does not terminate until the affairs of the limited partnership have been wound up. The affairs of a dissolving limited partnership are typically wound up by a general partner. However, a limited partner may wind up if necessary. © 2013 Delmar Cengage Learning

Cancellation of certificate of limited partnership Limited Partnership Dissolution, Winding Up, and Termination Causes of dissolution State statutes set forth several causes of dissolution of the limited partnership, including withdrawal of the sole general partner. Cancellation of certificate of limited partnership The existence of a dissolving limited partnership must be terminated by filing a cancellation of certificate of limited partnership. © 2013 Delmar Cengage Learning

SETTLEMENT AND DISTRIBUTION OF ASSETS Limited Partnership Dissolution, Winding Up, and Termination SETTLEMENT AND DISTRIBUTION OF ASSETS In most states, assets are paid out until exhausted in the following order: 1. To the creditors, including any partners who are creditors 2. To partners, to satisfy any distributions due to them under the partnership agreement 3. To partners, as a return of their contributions 4. To partners, as a proportionate return of their partnership interest © 2013 Delmar Cengage Learning

Derivative Actions and Family-Limited Partnerships Derivative actions may be brought by a limited partner in the right of the limited partnership to recover a judgment in its favor. Family-limited partnerships may be formed by families to help pass family assets or businesses from one generation to the next. © 2013 Delmar Cengage Learning

© 2013 Delmar Cengage Learning The Paralegal’s Role Research state law concerning requirements for forming a limited partnership Research possible licensing requirements for the limited partnership business Research state law concerning the role of limited partners and restrictions on their participation in the management of the limited partnership Prepare limited partnership certificate Assist with drafting the limited partnership agreement Request federal tax identification number and state tax identification number (if required) © 2013 Delmar Cengage Learning

The Paralegal’s Role (Continued) Prepare and file a certificate of assumed or fictitious name for limited partnership (if applicable) Establish and organize a method for retaining limited partnership records Assist with drafting minutes of limited partnership meetings. Prepare any required amendments to the limited partnership certificate and agreement Assist with preparation of the limited partnership’s income tax return and Schedule K-1s for the partners Assist with winding up and dissolution of the limited partnership © 2013 Delmar Cengage Learning