Limited Partnerships and Limited Liability Companies

1
Limited Partnerships and Limited Liability
Companies

• Chapter 33

2
Limited Partnership versus General Partnership

• A limited partnership is composed of one or more
  general partners and one or more limited
  partners.
• Differ from general partnership
• A limited partnership is created under specific
  statutory authority
• Liability of limited partner for partnership
  debts is LIMITED to the capital contribution.

3
Formation

• File a Certificate of Limited Partnership
• Name address of limited partnership and of the
  general partners (not of limited partners) agent
  for service of process latest date for
  dissolution
• Affidavit declaring the limited partners capital
  contributions
• Written, signed partnership agreement
• May contribute cash, property, services or
  promissory notes
• Admission of additional limited partner after
  formation requires written consent from all
  partners.
• Cant use limited partners surname in
  partnership name
• Partnerships name must contain Lmtd., or Limited
  

4
Defective Formation

• Defective if a ailure to file a certificate of
  limited partnership, or if the certificate does
  not substantially meet the statutory
  requirements.
• The possibility exists for liability as a general
  partner UNLESS
• limited partner files a corrected certificate or
  an amendment curing the defect or
• limited partner withdraws from the business and
  renounces his interest in the partnerships
  future profits.

5
Limited Partners Rights

• Rights listed in Certificate of Limited
  Partnership and Partnership Agreement
• Right to Inspect the Books
• Right to Demand an Accounting
• NO RIGHT to manage/control the partnership
• Right to vote on limited matters
• Right to share in profits and losses
• Right to request a dissolution, wind up decree
• Right to loan money, transact business
• Right to withdraw w/6 months notice
• Right to assign limited partnership interest,
  (profits, distributions), but not status

6
Limited Partners safe harbor

• A limited partner can lose limited partnership
  status, and be exposed to unlimited personal
  liability, if he participates in the control of
  the business.
• Control is not defined, but its NOT
• Being an agent, employee of the limited
  partnership, or an officer, director,
  shareholder of a general partner that is a
  corporation
• Consulting/Advising a general partner
• Acting a s a surety/guarantor
• Bringing a derivative action
• Requesting/Attending a meeting of partners
• Voting on certain matters

7
Limited Partners May Vote on Extraordinary Matters

• Dissolution/winding up
• Amendment of partnership agreement or certificate
  of limited partnership
• Sale, lease, mortgage, exchange of all or
  substantially all of the partnerships assets.
• Admission/Removal of ANY partner
• Any matter involving a potential conflict of
  interest b/w a partner and the limited
  partnership
• A change in the nature of the business
• Incurrence of debt other than in the ordinary
  course of business.

8
Fiduciary Duties

• General Partner owes a fiduciary duty to limited
  partner (but not as high a duty as is owed to
  general partners). However, the limited partner
  probably does NOT owe a fiduciary duty to the
  general partners or to the limited partnership
  itself.
• Therefore, its a one way street
• Limited partners are not agents of the
  partnership

9
Sharing of Profits and Losses

• Allocated according to the Partnership Agreement.
• If Agreement is silent, profits and losses are
  allocated on the basis of the value of the
  contributions made by each limited partner.
• Contrary to the UPA the rule for general
  partnerships which, unless the Agreement states
  otherwise, divides profits and losses
  equally...regardless of contributions

10
Liability

• Limited Partners are liable only up their
  capital contributions.
• Limited partnership status could be lost upon
  defective formation improper participation or
  control in the business or, if a limited
  partner uses his surname in the partnerships
  name.
• Liability for a false statement in the
  Certificate could extend to anyone who relied on
  the certificate.

11
Distributions

• Limited Partners may receive a share of the
  profits or other compensation, provided that
  after such payment, partnership assets are in
  excess of all liabilities to creditors.
• May receive a share in a proportion different
  than the way they share profits.

12
Dissolution

• Death or bankruptcy does NOT dissolve the limited
  partnership.
• May occur upon the time stated in the
  Certificate.
• May occur upon a specified event.
• May occur upon unanimous consent of partners.
• Court decree
• May occur upon the withdrawal of a general
  partner unless there is at least one other
  general partner and the partnership agreement
  permits continuation, OR all partners agree
  within 90 days (in writing) to continue.

13
Distribution of Assets Upon Winding Up

• In settling accounts, the liabilities of the
  limited partnership shall be paid in the
  following order
• 1. Creditors, including limited partners for
  loans
• 2. Limited partners for undistributed profits and
  compensation
• Limited partners for capital contributions.
• General partners for loans
• General partners for profits
• General partners, for capital contributions

14
Limited Liability Companies

• Hybrid of corporate and partnership
  characteristics
• Partners are called members (owners) and they can
  participate in management and control of
  business.
• Neither members nor managers personally liable
  for company debts creditors must look to assets
  of the company. But, a manager may be personally
  liable to LC or third parties if a violation of
  criminal law, manager derives an improper
  personal benefit, willful misconduct, malicious
  purpose, willful disregard of human safety.

15
Formation

• Some states allow only one member Florida
  requires at least TWO members.
• Filing of Articles of Organization
• Identify status by using the words limited
  liability company
• Contribution by cash, property, services rendered
  or promissory note.

16
Tax Consequences

• Special tax treatment with losses passing through
  to shelter investors other income under the
  federal income tax laws, and qualifies for
  taxation as a partnership (interest is considered
  personal property).
• Fails 2 of the 4 essential tests for
  corporateness
• Does NOT meet continuity of life test.
• Does NOT meet the free transferability test. LC
  members interest rights to profits/losses can
  be assigned ONLY upon consent of nonassigning
  members. Assignee can become member upon
  unanimous consent.
• May or may not meet centralized mgmt test.Mgmt of
  LC is vested in proportion to capital
  contributions but Articles may provided otherwise
  (1 member, 1 vote) or vest mgmt. in a manager
  elected annually by members.
• Meets lmtd. liability test Cs cant sue
  members.

17
Membership Rights

• Operating Agreement states profits losses. If
  silent, its based on members contributions.
• Service of process may be served upon any
  member
• Power to elect managers (agents) who have
  authority to contractually bind the LC
  (manager-managed LC).
• If the articles vest management in its members,
  any one member may incur indebtedness or
  otherwise bind LC.

18
LLC Enjoys Powers Accorded Corporations

• Governed by internal by laws
• Msy sue or be sued in its own name
• Acquire/dispose of real personal property.
• May hold title in its own name
• Make donations (scientific, charitable, etc.)
• May be a general or limited partner
• Able t appoint agents to bind company

19
Dissolution of LC

• Expiration of period of duration
• Unanimous written consent of all members
• Death, retirement, Expulsion of any member,
  unless business is to continue as designated
  within the Articles.
• (In Florida), when LC has less than 2 members

20
Limited Liability Partnerships

• A general partnership which, by making a
  statutory filing and becoming a registered
  limited liability partnership, limits the
  individual liability of its partners for
  obligations or liabilities of the partners (tort,
  contracts or otherwise) arising from errors,
  omissions, negligence, malpractice, or wrongful
  acts committed by another partner or by an
  employee or agent of the partnership

21
Formation

• Name must contain words, Registered Limited
  Liability Partnership or L.L.P and name must
  be recorded with Dept. of State.
• Registration name, address, description of
  business, effective date of partnership
• Fee of 100 per partner.
• Insurance

22
Insurance

• A copy of the insurance policy demonstrating the
  partnership carries at least the minimum coverage
  amount of liability insurance to cover errors,
  omissions, negligence, malpractice, wrongful
  acts.
• An affidavit sworn by a majority of partners that
  partnership has minimum coverage amount in funds
  to satisfy judgments.
• The minimum coverage amount is 100,000
  multiplied by a number of general partners in
  excess of one, but in no event less than 200,000
  or greater than 3 million.

23
Exceptions to Limited Liability

• A partner in a registered limited liability
  partnership is individually liable for
• any errors, omissions, malpractice, wrongful acts
  committed by THE PARTNER HIMSELF or any person
  under the partners direct supervision and
  control in the activity of which the act
  occurred.
• Any debts for which the partner agreed in
  writing to be liable.
• If LLP is omitted from the name, any person who
  participates in or consents to omission is liable
  for damages occasioned by omission (but, there
  will be no liability if the claimant should have
  had actual notice that partnership was a LLP.)

24
Limited Liability Limited Partnerships

• Limited Partnership in which the liability of the
  general partner has been limited to the same
  extent as in an LLP.
• Not in Florida (?)