Limited Partnerships

1
Limited Partnerships

• Chapter 5

2
Limited Partnerships

• Designed to eliminate the risk of losing personal
  assets to business debts and/or judgments.
• Takes the basic arrangement found in a general
  partnership and adds the protection of limited
  liability.
• Under limited liability, a person who qualifies
  as a limited partner limits his or her maximum
  possible legal obligation to the total amount of
  investment in the business.

3

• In a limited partnership, there are general
  partners and limited partners.
• Limited partners do not face liability for
  business debts.
• They also have no control over day-to-day
  operations within the business.

4

• In a limited partnership, general partners
  fulfill the same roles and perform the same
  duties as they do in a general partnership they
  also face personal liability.
• Limited partners are protected by limited
  liability.

5
Limited Partnerships Authorization by State
Statutes

• Old common law cases and interpretations do not
  apply to limited partnerships because they are
  creatures of statute, not of case law.
• Researching limited partnerships should
  concentrate on state statutes and the cases that
  apply to them.

6
Uniform Limited Partnership Act

• The Uniform Limited Partnership Act was created
  in 1916, with major revisions to the act since
  its creation.
• However, the basic formulation of a limited
  partnership remains the same general partners
  manage the business and limited partners share
  the profits and losses of the business but have
  no input on day-to-day management.

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Differences between Limited Partnerships and
General Partnerships

• The most important difference between general
  partnerships and limited partnerships is the
  issue of limited liability.
• However, with this protection come limitations.
  Limited partners are prohibited from taking an
  active role in the business. They cannot manage
  the day-to-day affairs, negotiate contracts, or
  hire and fire employees.

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• A general partner in a limited partnership
  operates almost in the same way as a regular
  partnership.
• They face extensive liability but counterbalance
  that with the rights to conduct the business,
  including the right to make decisions affecting
  the course of the business without seeking
  approval from the limited partners.

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Advantages of Limited Partnerships

• The advantage of a limited partnership is that it
  provides a vehicle for individuals to invest
  money in a business without the threat of
  personal liability for business losses and debts.
• Limited partners share in both profits and losses
  of the business, but only to the extent of their
  investment.
• The limited partnership structure also has
  important advantages when it comes to personal
  income taxes.

10
Tax Consequences of Limited Partnerships

• Limited partners are permitted to "pass through"
  business losses on their personal income tax
  returns or pay income taxes on business profits.
• If a business shows a loss, that loss may
  actually improve the limited partners overall
  tax liability for the year.

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• Sidebar Limited partnerships are still very
  popular, especially in ventures such as real
  estate purchase and development, where the
  chances of profits are very high but where legal
  liability often prevents individuals from risking
  their personal assets to engage in the business.

12
The Limited Partner's Contribution

• In order to enter into a limited partnership
  agreement, the limited partner must invest in the
  company. This investment is normally referred to
  as a contribution.
• The extent of the contribution reflects the
  percentage of the limited partners rights to
  profits from the enterprise.

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• Although a limited partners contribution usually
  comes in the form of a cash investment, the law
  allows other types of contributions.
• The Uniform Limited Partnership Act is liberal on
  the topic of what constitutes a contribution, so
  long as the contribution consists of something of
  value. (Revised Uniform Limited Partnership Act
  101 1976 version.)

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Creation of a Limited Partnership

• A limited partnership comes into existence only
  after complying with the strict statutory
  guidelines.
• The most important of the statutory requirements
  is the certificate of limited partnership.

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The Certificate of Limited Partnership

• All states require that any business considering
  operating as a limited partnership must file
  appropriate documentation with the state.
• One of the most important of these documents is
  the certificate of limited partnership.

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• State governments require the following minimum
  information in the certificate of limited
  partnership
• The name of limited partnership
• The street and mailing address of the agent for
  service of process
• The street and mailing address of the designated
  office of the limited partnership
• The name, street, and mailing addresses of all
  general partners

17
Naming of a Limited Partnership

• States have different approaches to the names
  that can be used in limited partnerships. The
  most common limitations include
• They cannot contain the name of a limited
  partner
• They can bear the name of a general partner
• The name of the partnership must include the
  words "Limited partnership" or the letters LP
  or L.P.
• The limited partnership cannot use a name that is
  substantially similar to a preexisting business.

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Reserving a Name

• In most states, the secretary of states office
  allows businesses to reserve names for a period
  of 120 days prior to filing the certificate of
  limited partnership.
• In this way, a business can prevent others from
  taking the name that the business intends to use.
  (Revised Uniform Limited Partnership Act 103
  (1976 Revision)

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Agent for Service of Process

• An agent for service of process is a person or
  business that is designated by the limited
  partnership in its certificate to accept service
  of process.
• This means that if anyone wishes to sue the
  business, they will have a specific person
  designated to receive the pleadings.

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• Because a limited partnership enjoys the
  protections of limited liability, limited
  partners cannot be served with lawsuits seeking
  redress against the partnership.
• Instead, the limited partnership must designate
  an agent who will receive the pleadings.

21
Individuals Who Qualify as an Agent for Service
of Process

• An agent for service of process can be an
  individual who is a resident of the state or can
  be another form of business, such as a
  corporation, which is authorized to do business
  in the state.
• Regardless of the identity of the agent, the
  agent must be listed in the certificate of
  limited partnership so that the agent can be
  located and served with the appropriate paperwork.

22
Designated Office Address

• Limited partnerships must provide information to
  the state about the location of the main office
  for the partnership, known as the business
  address.
• This business address is where the partnership
  records are maintained.

23
The General Partners

• The certificate of limited partnership must also
  identify the general partners.
• These partners must be listed by name and
  address.

24
Individuals Who Qualify as a General Partner

• One feature of limited partnerships is that a
  single person may be both a general partner and a
  limited partner at the same time.
• However, such an arrangement does not protect the
  general partner to any greater degree.
• The general partners would still face unlimited
  liability for business debts and judgments.

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• When the certificate is presented and the state
  has determined that the certificate is in
  substantial compliance with state law, the
  certificate is filed, and a limited partnership
  is created. In most states, the office
  responsible for maintaining these records is the
  secretary of states office.

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Limited Partnership Agreements

• The individuals involved in the business will
  draft an agreement called the Limited Partnership
  Agreement.
• This agreement determines how the business will
  be run and how profits and losses will be shared
  among general and limited partners.

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• State law governs the drafting of the agreement
  but allows the parties flexibility in drafting
  specific provisions.
• The parties are free to negotiate any terms that
  they like, as long as their agreement does not
  run counter to the law, public policy, or the
  established parameters of the partners rights
  and obligations.

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Construction of the Language in a Limited
Partnership Agreement

• Limited partnership agreements are contracts
  between the partners and are construed like any
  other contract.

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Elements of a Limited Partnership Agreement

• Duties and responsibilities of general partners
• Remedies available for breach of those duties
• Qualification as a limited partner
• Distribution of profits and losses
• Classification of contributions
• Partnership meetings
• Dissolution and winding up

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Duties and Responsibilities of General Partners

• General partners owe a fiduciary duty to the
  other partners, both general and limited, meaning
  that a partner must act in the best interests of
  the other partners and the business.

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• Among the fiduciary duties owed by general
  partners to the other partners are
• Duty to Act in Good Faith
• Duty of Fairness
• Duty of Loyalty

32
Duty to Act in Good Faith

• General partners must not attempt to personally
  enrich themselves at the expense of the business.
  
• They must keep the best interests of the business
  and partners foremost in their minds.
• They cannot engage in self-dealing, which is the
  practice of using information, assets, or other
  company property to personally enrich themselves.

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Duty of Fairness

• The duty of fairness is closely tied to the duty
  to act in good faith.
• A general partner must act fairly towards other
  partners.

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Duty of Loyalty

• Partners must be loyal to one another and avoid
  practices that put the individuals interests
  ahead of the companys interests.

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Remedies for Breach of Fiduciary Duty

• The parties can dissolve the partnership.
• They can also file suit against the partner,
  asking the court to rule that the general
  partners unauthorized personal gain should be
  seized and redistributed among the partners.
• In such a situation, courts often rely on the
  constructive trust doctrine.

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• Constructive trust doctrine The theory that a
  partner who acquires profits for his or her own
  enrichment holds such funds for the benefit of
  the company as a whole and can be ordered to
  return such funds to the other partners.

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Distribution of Profits

• One of the most important elements of the limited
  partnership agreement is the issue of
  distributing profits.
• The profits distributed among the limited
  partners are generally determined by the limited
  partners percentage of ownership in the
  business.

38
Classification of Contributions

• Classification of contributions becomes important
  when the limited partnership is dissolved. A
  partner may be entitled to return of specific
  property or remuneration of actual value of any
  contribution.

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Partnership Meetings

• Partnership meetings are important for both
  general and limited partners because they set
  protocols and establish the direction of the
  business.
• The partnership meeting is also where the
  official decision to terminate the partnership is
  made.

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Dissolution of a Limited Partnership

• Limited partnerships can terminate in a number of
• ways
• The partnership may terminate when a certain
  event occurs, or
• Courts may dissolve the partnership under the
  doctrine of judicial dissolution, or
• The secretary of state may dissolve a partnership
  that has failed to pay appropriate fees and taxes
  or failed to file an annual report with that
  office.

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• Judicial dissolution A courts determination
  that a company should be dissolved for the good
  of the partners, creditors, or because the
  business has engaged in illegal activities.

42
Winding Up Business Affairs

• The dissolution of a limited partnership only
  occurs after a period of winding up the
  business affairs.
• This period includes finalizing any payments,
  accepting shipments, reconciling accounts
  receivable, and any other routine business
  matters.
• Once all creditors have been paid, the partners
  are free to distribute the remaining assets among
  themselves according to the terms of the limited
  partnership agreement.

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Summary

• Limited partnerships enjoy the protection of
  limited liability.
• Limited liability means that the most that a
  party can lose in a particular business
  transaction is the amount of his or her
  investment.

44

• Summary
• The Uniform Limited Partnership Agreement Act has
  been adopted in all states and provides a
  mechanism for creating a limited partnership.
• Before a limited partnership can be created, the
  appropriate documents must be completed and filed
  with the state.
• A limited partnership consists of one or more
  general partners and one or more limited
  partners.

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• Summary
• General partners have duties and obligations
  including running the day-to-day operation of the
  business, making business decisions, and hiring
  and firing employees.
• Limited partners have no such authority and are
  not permitted to control the actions of the
  general partners.
• General partners in a limited partnership are not
  protected by limited liability any more than
  general partners in any other type of business.

46

• Summary
• Limited partnerships can dissolve by their own
  terms or by judicial interaction.
• Once dissolved, there is a period of winding up
  business affairs before profits can be
  distributed to the partners.