LIMITED PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS CHAPTER 35 LIMITED PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS © 2010 Pearson Education, Inc., publishing as Prentice-Hall

Limited Partnership Partnership with 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 contribution.

Limited Partnership (continued) A limited partnership must have at least one general partner and one limited partner. No restrictions on maximum number of general or limited partners allowed. Any person may be a general or limited partner. Natural person, partnership, limited partnership, trusts, estates, associations, and corporations are “persons.” If corporation is sole general partner, liable only to extent of its assets.

Revised Uniform Limited Partnership Act (RULPA) 1976 revision of the original 1916 uniform act. Further amended in 2001. Modern, comprehensive law for the formation, operation, and dissolution of limited partnerships. Majority of states have adopted.

Limited Partnership (continued) Debt or obligation owed Limited Partnership Third Party Capital investment General Partner General Partner Limited Partner Limited Partner Liability limited to capital contribution Personal liability for partnership’s debts and obligations No personal liability for partnership’s debts and obligations

Formation of Limited Partnerships Formal process of creation. Statutory requirements set out in RULPA or other state statute. Requires public disclosure.

Certificate of Limited Partnership Two or more persons must execute and sign. Contains: name of limited partnership, purpose, names and addresses of partners, agent, and principal place of business, information on contributions of each partner. Must be filed with secretary of state. Partnership formed when certificate filed.

Amendments to Certificate of Limited Partnership Certificate must be kept current by filing amendments Filed at same offices as certificate Changes must be filed within 30 days Change in capital contributions Admission of new partner Withdrawal of partner Continuation of business after judicial dissolution after withdrawal of last general partner

Name of Limited Partnership Firm name of limited partnership may not include the surname of a limited partner unless: it is also the surname of a general partner, or the business was carried on under that name before the admission of the limited partner.

Name of Limited Partnership (continued) Other restrictions: Name cannot be the same as or deceptively similar to names of other businesses or partnerships. States may designate words that cannot be used in limited partnership names. Name must contain without abbreviation the words limited partnership.

Capital Contributions Under RULPA, contribution may be in cash, property, services rendered, or a promissory note or other obligations to contribute cash, property, or to perform services. Partners or creditors may bring lawsuit to enforce promise to make contribution.

Defective Formation Occurs when: Certificate not properly filed, Defects in certificate that is filed, or Some other statutory requirement for creation of limited partnership not met. In case of such defects, limited partners may be liable as general partners. May correct defects and escape liability as general partners by filing certificate of amendment filed or certificate of withdrawal.

Limited Partnership Agreement Sets forth: Rights and duties of the general and limited partners, E.g., voting rights, approvals needed for certain transactions. Terms and conditions regarding the operation. Dissolution and termination terms. If no agreement, certificate serves as agreement.

Share of Profits and Losses (continued) 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 from a limited partnership are shared on the basis of the value of the partner’s capital contribution. Limited partner not liable for losses beyond capital contribution.

Right to Information Each limited partner has right to obtain full information regarding state of business, its finances. Partnership must keep the following records at its principal office: Certificate and all amendments Full names and addresses of each partner Written limited partnership agreements All income tax returns Three years of financial statements

Admission of New Partners 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 all partners. Agreement cannot vary this requirement. Admission effective after amendment filed.

Foreign or Domestic? Domestic Limited Partnership – A limited partnership in the state in which it is formed. Foreign Limited Partnership – A limited partnership in all other states than the one in which it was formed.

Foreign or Domestic? (continued) Under RULPA, the law of the state in which the entity is organized governs its organization, its internal affairs, and the liability of its limited partners. Certificate of Registration permits a foreign limited partnership to transact business in a foreign state.

Master Limited Partnership Limited partnership interests traded on organized security exchanges. E.g., NYSE. Public investors are limited partners, typically receive quarterly dividends. Advantages: liquidity, certain tax benefits. Only permitted for certain businesses. E.g., oil and gas, financial services, some real estate enterprises.

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 amount of their capital contributions. Not personally liable.

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.

Permissible Activities of Limited Partners Being an agent, employee, or contractor of the partnership or a general partner. 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 certain other partnership matters. E.g., dissolution, incurring debt, or removal of general partner.

Liability on Personal Guarantee When partnership applies for credit, creditor may require a limited partner to guarantee the repayment of the loan in order to secure loan. Creditor may enforce personal guarantee if limited partnership defaults.

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

Control Rule Limited partners who take part in management of partnership traditionally lose limited liability. 2001 RULPA amendments eliminates this restriction. May participate in management without becoming personally liable on debts and obligations of the partnership.

Dissolution of a Limited Partnership Partnership dissolved: As specified in the certificate of limited partnership (e.g., on some particular date). When all general and limited partners give written consent. When a general partner withdraws. Unless certificate otherwise states or partners otherwise agree in writing. When decree of judicial dissolution is entered.

Winding-Up a Limited Partnership A limited partnership must wind up its affairs upon dissolution. Certificate of cancellation must be filed by the limited partnership with the secretary of state of the state in which the limited partnership is organized.

Distribution of Assets After the assets of the limited partnership have been liquidated, proceeds must be distributed. The RULPA provides the following order of distribution of partnership assets: Creditors of the limited partnership Partners with respect to Unpaid distributions Capital contributions The remainder of the proceeds

Limited Liability Limited Partnership (LLLP) Available under 2001 amendments to RULPA. General partners not jointly and severally personally liable. Neither general partners nor limited partners have personal liability.