Chapter 18 The Limited Partnership
Documents for LP
1 page document filed with secretary of state Must put the world on notice because not everyone is liable Individuals may not have liability Same rules for name searches cannot be misleading Some states will want it designated with the LP on the end
Benefits of the Limited Partnerships
1. Limited liability - first type of law where you can invest but have limited liability There is lots of case law on this à LLC will borrow from the case law on limited partnerships 2. Old people like it because they understand it 3. Oil & Gas - people want to invest in a oil well and be passive, good investment vehicle 4. We can use limited partnerships for tax purposes Spread income out so it is not all loaded on 1 individual
RULPA § 804. Distribution of Assets.
1. creditors 2. deficient partners' distributions 3. return of contributions 4. surplus paid as distributions
RULPA § 603. Withdrawal of Limited Partner.
A limited partner may withdraw from a limited partnership at the time or upon the happening of events specified in writing in the partnership agreement. If the agreement does not specify in writing the time or the events upon the happening of which a limited partner may withdraw or a definite time for the dissolution and winding up of the limited partnership, a limited partner may withdraw upon not less than six months' prior written notice to each general partner at his [or her] address on the books of the limited partnership at its office in this State. Hague Æ know the rationale behind Æ being able to just walk away Limited partnership law requires that 6 month notice
ULPA § 801. Nonjudicial Dissolution.
A limited partnership is dissolved, and its activities must be wound up, only upon the occurrence of any of the following: the happening of an event specified in the partnership agreement; the consent of all general partners and of limited partners owning a majority of the rights to receive distributions; after the dissociation of a person as a general partner (except when certain requirements are met). Unanimity/agreement/look to judicial dissolution
RULPA § 801. Nonjudicial Dissolution.
A limited partnership is dissolved: (1) at the time specified in the certificate of limited partnership; (2) upon the happening of events specified in writing in the partnership agreement; (3) upon the written consent of all partners; (4) an event of withdrawal of a general partner under 402 (except when certain requirements are met if the general partner walks away and no one wants to come in & fill the seat à LP must die muhahahaha); or (5) By entry of a decree of judicial dissolution under Section 802. Go to ct. & tell the judge "I want you to dissolve this" This is difficult to tell the J. to come in and dissolve the LP with a business hat on
ULPA (2001) § 301. Becoming Limited Partner
A person becomes a limited partner: as provided in the partnership agreement; or with the consent of all the partners. Example: judgement creditor à limited partner receives distributions The only person that has power is the general partner à sick of running the company by themselves -à even with transferrable interests if it silent à requires written consent of ALL Removing the general partner à unanimity Partnership agreement might say something else but if there is no written agreement à written consent of all partners
RULPA § 304(b). Person Erroneously Believing Himself Limited Partner.
A person who makes a contribution of the kind described in subsection (a) is liable as a general partner to any third party who transacts business with the enterprise (i) before the person withdraws and an appropriate certificate is filed to show withdrawal, or (ii) before an appropriate certificate is filed to show that he or she is not a general partner, but in either case only if the third party actually believed in good faith that the person was a general partner at the time of the transaction.
ULPA (2001) § 702. Transfer of Partner's Transferable Interest.
A transfer of a partner's transferable interest: Does not cause dissolution or winding up; Does not entitle transferee to participate in management Only gives the transferee a right to receive distributions to which transferor would otherwise be entitled, including the net amount owed to transferor upon dissolution and winding up
RULPA § 401. Admission of Additional General Partners.
After the filing of a limited partnership's original certificate of limited partnership, additional general partners may be admitted as provided in writing in the partnership agreement or, if the partnership agreement does not provide in writing for the admission of additional general partners, with the written consent of all partners. *Note: (ULPA (2001) has a similar provision.)
Requirements for a Limited Partnership
At least 1 general partner and 1 limited partner
Formation: Improper filing/mix up/ etc. are you now just treated a general partnership? Depends on facts of transaction at hand, who is trying to enforce liability etc.
Create (1) substantial compliance with statute and (2) reliance component NOT liable as a GP if you do something to fix it AND you can show the 3rd party NOT rely on you 3rd party must show reliance à burden of proof will be on them
RULPA § 604. Distribution Upon Withdrawal.
Except as provided in this Article, upon withdrawal any withdrawing partner is entitled to receive any distribution to which he is entitled under the partnership agreement and, if not otherwise provided in the agreement, he is entitled to receive, within a reasonable time after withdrawal, the fair value of his interest in the limited partnership as of the date of withdrawal based upon his right to share in distributions from the limited partnership. Fair market value is pretty vague Might just be changing the make up of how is coming and going
Issue: Do limited partners have fiduciary duties?
General Rule: NO BUT if they are participating in control of that entity when you act like a general partner that ACTS like they control stuff à potentially have fiduciary duties on your shoulders This is an exception to the rule!!
ULPA § 804. Distribution of Assets.
If your partnership agreement is silent à might be treated unfairly ULPA is not as detailed à more generalized requiring more in our limited partnership agreement
What is a limited partnership?
Limited partnerships can only be formed by filing a certificate of limited partnership with the secretary of state of the JRDX LP is a creature of statute comprised of at least one general partner ("GP") and at least one limited partner.
Control of the entity Partner Through Sale or Merger
Management and voting rights are NOT transferable in an LP
ULPA § 802. Judicial Dissolution.
On application by a partner the [appropriate court] may order dissolution of a limited partnership if it is not reasonably practicable to carry on the activities of the limited partnership in conformity with the partnership agreement
RULPA § 802. Judicial Dissolution.
On application by or for a partner the [designate the appropriate court] court may decree dissolution of a limited partnership whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement. Making money & employing individuals
RULPA § 602. Withdrawal of General Partner.
RULPA § 602. Withdrawal of General Partner. A general partner may withdraw from a limited partnership at any time by giving written notice to the other partners, but if the withdrawal violates the partnership agreement, the limited partnership may recover from the withdrawing general partner damages for breach of the partnership agreement and offset the damages against the amount otherwise distributable to him [or her]. If withdrawing violates the PSHIP agreement/ creates a loss --. Go after GP But generally the GP can leave at any time B/c there is liability, control,
Limited Partnership Agreement (RULPA)
RULPA: written OR oral and it is enforceable NOT advisable to ever have an oral contract à NOT allowed to be implied from course of action OR course of dealing
ULPA (2001) § 701. Partner's Transferable Interest.
The only interest of a partners which is transferable is the partner's transferable interest, which means a partner's right to receive distributions.
Hypothetical: Æ get full consent for removal, corporation instead of a person as GP. Carl SH (100%) wants Larry to be the GP
There is Æ in the law to stop the share transfer of Carl to Lary moving ABC and placing Larry in charge This can also be accomplished by merging XYZ with Larry's corporation How do you get around this if you have some fear, representing the limited partners, Need language: "The General Partner may transfer or assign its General Partner's interest only after written notice to all of the other Partners and the unanimous vote of all of the other Partners to permit such transfer." See Star Cellular v. Baton Rouge
RULPA § 304(a). Person Erroneously Believing Himself Limited Partner
This is a person erroneously investing and believing they have protections à good faith component, Except as provided in subsection (b), a person who makes a contribution to a business enterprise and erroneously but in good faith believes that he [or she] has become a limited partner in the enterprise is not a general partner in the enterprise and is not bound by its obligations by reason of making the contribution, receiving distributions from the enterprise, or exercising any rights of a limited partner, if, on ascertaining the mistake, he [or she]: (1) causes an appropriate certificate of limited partnership or a certificate of amendment to be executed and filed; or (2) withdraws from future equity participation in the enterprise by executing and filing in the office of the Secretary of State a certificate declaring withdrawal under this section.
Whoever you agree to give the title of GP Under RULPA § 403(a):
Under RULPA § 403(a): General partners in a LP have the same rights and powers as a general partner in a general partnership. This includes the ability to participate in management, the ability to bind the partnership via apparent authority, and the ability to vote. BUT: These rights and powers are only default rules. I.e., a partnership agreement can restrict, limit, or alter them
5 Aspects of Limited Parnterships
Unlike a general partnership, a limited partnership requires a statutory filing for creation; General partners have unlimited personal liability for the obligations of the limited partnership, while limited partners have limited liability; Limited partnerships provide their owners with significant contractual freedom and flexibility; Look to the agreement, the statutes that we see, we can displace them Limited partnerships are subject to pass-through tax treatment; and The limited p-ship IS NOT taxed General partners typically (though not always) have the right to manage the venture while the limited partners serve primarily as passive investors. Differentiation in control/management
Hypo: can limited partners act in a managerial role and still remain limited partners?
Yes if they do not exert control? RULPA does not grant or deny management rights to limited partners. BUT - under RULPA §303, limited partners who participate in the control of the business risk liability for some or all of the obligations of the venture.
If you have a question in Texas:
have a question in Texas: What does limited partnership agreement say? Can I answer this question under RULPA? Can't find it in RULPA? Look to general partnership ULPA and RULPA Case law
Limited Partners
no liability for the debts of the venture beyond the loss of his investment; often does not exercise control.
ULPA 2001 [pick your partner rule]
the only transferable thing is that partnership interest à all that person is getting is that financial interest à only distributions/financial rights
General Partner
unlimited liability for the obligations of the firm; generally controls the firm. They have unlimited liability because they control and make decisions.
Limited Partnership Agreement (ULPA)
written, oral, OR implied (just your course of action may implicate you)
RULPA (1985) Pick your partner rule! § 702. Assignment of Partnership Interest.
§ 702. Assignment of Partnership Interest. A partnership interest is assignable, but does not give the assignee any partnership rights, except to distributions to which the assignor would be entitled § 704. Right of Assignee to Become Limited Partner. An assignee of a partnership interest may become a limited partner if and to the extent that (i) the assignor gives the assignee that right in accordance with authority described in the partnership agreement, or (ii) all other partners consent.