The Limited Partnership (LP)
Defective Formation
A person who makes a contribution to a business enterprise and erroneously but in good faith believes that they have become a limited partner in the enterprise is NOT a general partner in the enterprise and is NOT bound by its obligations, IF on ascertaining the mistake, they: -Cause an appropriate certificate or amendment to be executed and filed, OR -Withdraws from future equity participation in the enterprise by executing a filing a certificate declaring withdrawal w/ the Secretary of State Such a person IS liable as a general partner to any 3rd party who actually believed in good faith that the person was a general partner AND transacts business w/ the enterprise either: -Before the person withdraws and files a certificate, OR -Before a certificate is filed to show that they are not a general partner
Liability of Partners in a Limited Partnership
General Partners: unlimited liability for the obligations of the LP Limited Partners: no liability for the debts of the venture beyond the loss of their investment, UNLESS they participate in the control of the business
Entity Status
LPs are entities separate and distinct from owners
Limited Liability (General Rule)
Limited partners have no liability for the debts of the venture beyond the loss of their investments
Management and Operation: Limited Partners
Management: RULPA D/N grant or deny management rights to limited partners & it is unsettled whether limited partners can bind the venture to transactions in the ordinary course via apparent authority BUT, RULPA states that limited partners who participate in the control of the business risk liability for some or all of the obligations of the venture
Taxation Structure
Pass Through Taxation: the entity itself is NOT taxed; only the profits that are passed through to the partners are taxed
Management and Operation: General Partners
RULPA: general partners have the same rights and powers as a general partner in a GP (i.e. the ability to participate in management, the ability to bind the partnership via apparent authority, & the ability to vote) These rights and powers are default rules and may be restricted or altered by the partnership agreement
Voting Rights of Limited Partners
RULPA: the partnership agreement MAY grant to all or a specified group of the limited partners the right to vote (either per capita or pro rata) upon any matter ULPA 2001: provides limited partners w/ voting rights
Profits and Losses
RULPA: the profits, losses, and distributions of a limited partnership shall be allocated on the basis of the value of the contributions made by each partner (pro rata) to the extent they have been received by the partnership and have not been returned ULPA 2001: split distributions (not allocations) equally
Control of the Entity General Partner (Ex: General Partners that are corporations)
You can have a limited liability entity function as the general partner that is run by the limited partners w/o violating the control rule
Control Rule (ULPA)
a limited partner is NOT personally liable, directly or indirectly, by way of contribution or otherwise, for an obligation of the LP solely by reason of being a limited partner, even if the limited partner participates in the management and control of the LP *Does away w/ the control rule* -In order for a limited partner to be liable, P must prove fraud in order to pierce the LP veil
Control Rule (RULPA)
a limited partner who participates in control of the business is liable only to persons who transact business w/ the LP reasonably believing, based upon the limited partner's conduct, that the limited partner is a general partner 2 Elements for Limited Partners to be Liable: 1. Control, AND 2. 3rd party reasonably believes that the limited partner is a general partner Expands the safe harbor list of protected limited partner activities: a limited partner D/N participate in the control of the business solely by doing one or more of the following: -Being an agent or employee of the limited or general partner, or being affiliated w/ a general partner that is a corporation -Consulting or advising a general partner w/ respect to the business -Being financially liable for the debts of the business -Effecting a derivative action on behalf of the LP -Participating in meetings and voting of partners -Winding up the limited partnership
Ownership in an Limited Partnership
an LP is a more formal form of a partnership which classifies partners into 1) General Partners (controls the firm) & 2) Limited Partners (often D/N exercise control)
Limited Liability (Control Rule)
limited partners risk liability beyond their investment when they participate in the control of the business
Formation of an LP
-Requires a statutory filing for creation -A partnership agreement is not required, but highly recommended