Chapter 4 Limited Partnerships
names of LLPs must include which words (or abbreviations of those words)?
"limited liability partnership", "limited liability limited partnership," or an abbreviation of one of the 2
limited partnership continuity of existence
(advantage) LPs do not necessarily dissolve upon withdrawal of a general partner as long as: there is at least 1 other general partner; and, the parties' agreement permits the business to be continued by the remaining general partner
liability of limited partners in a limited partnership
(advantage) their personal liability is limited to their investment in the business provided they do not participate in controlling the business
Texas certificate of formation effective date of filing options
1. date filed 2. designate a date 3. effective on the occurrence of a specified event
Revised Uniform Limited Partnership Act (RULPA)
1. limits personal liability for limited partners in exchange for their not managing the business and 2. supplies default provisions where LP agreement is silent and some mandatory terms
general partners in a limited partnership can either
1. share management and rely on each other for expertise and advice and/or 2. appoint certain partners or committees to manage the business
Under Texas law, if a limited partnership agreement is silent on the general partners' voting rights regarding the management of the business, what voting rights do the general partners have by default?
All general partners have equal votes, regardless of their respective capital contributions to the partnership
Governing Law: Revised Uniform Limited Partnership Act (RULPA)
All states except LA base their LP statutes on RULPA; yet RULPA has been revised twice and not all states have adopted the latest amendments; variations exist from state to state
In Texas, an LP is formed by filing what document with the TX Secretary of State
Certificate of Formation - Limited Partnership, Form 207
Problem with general partnerships and the reason for limited partnerships' formation
General partnerships found it difficult to find investors to invest in the business because few investors were willing to expose their personal assets to unlimited liability
exception to "nonjudicial dissolution" triggers: term set forth in certificate of formation expires; event specified in LP agreement requiring dissolution occurs
LP agreement provides otherwise; or within 90 days of the event, all remaining partners (or other group or percentage of them specified in LP agreement) agree in writing to continue the business
limited partnership agreement - withdrawal of limited partners
LP agreement should specify when and under what circumstances limited partner may withdraw
when doing business in state other than state of formation
LP must file appropriate application or certificate in other state
distinction between limited partnership and limited liability partnership
LP: general partner has unlimited personal liability; LLP: no partner has unlimited personal liability
limited partnership governing law - state law
Revised Uniform Limited Partnership Act (RULPA) State law also regulates assumed/trade names, business licenses, and sales/unemployment/state income taxes
TX names/addresses of LPs' registered agents available on
TX SoS Web site, via SOSDirect Service
franchise tax is handled through
TX comptroller of public accounts
Does a Limited Partnership have the ability to "check the box" on IRS Form 8832 indicating their elections to be double taxed like corporations?
Yes, as they are taxed in the same way as general partnerships
event of withdrawal
action that usually requires winding up of the LP's business
limited partnership profits-losses allocation advantage/disadvantage
advantage: partners share losses disadvantage: partners share profits
Primary purposes of RULPA
afford limited liability to limited partners, who in exchange forego any management of the partnership, so that their maximum potential loss is their investment in the enterprise; to act as a default statute of LPs if a dispute arises on some issue on which the partners' agreement is silent
limited partnership - admission of new general and limited partners
agreement should specify vote required for admission. In TX, if agreement is silent on this issue, then written consent of all partners is required
who signs certificate of formation in TX?
all general partners; however, the signatures need not be notarized
Five triggers of nonjudicial dissolution in TX
all partners voluntarily consent to dissolution in writing; term set forth in certificate of formation expires; event specified in LP agreement requiring dissolution occurs; general partner commits event of withdrawal; the last limited partner withdraws from the LP
judicial dissolution in TX
any partner or his or her legal representative or transferee can file suit and, for cause (reason) shown, obtain a judicial decree winding up, dissolving, or terminating the LP
what LP must file with TX SoS to register as LLP
application with SoS
limited partnerships' transferability of interest - advantages re: limited partners
assignee of limited partner's interest will become new limited partner if the LP agreement allows it or if all other partners agree; limited partner generally has right to withdraw from partnership and demand return of contributions upon giving 6 months' written notice to each general partner
what is the minimum number of general partners a LP must have?
at least 1
exception to "nonjudicial dissolution" trigger: general partner commits event of withdrawal
at least 1 general partner remains and both of the following occur: LP agreement permits remaining general partner(s) to continue LP business; and, remaining general partner(s) inf act continue LP business or within 1 year of event of withdrawal, all remaining partners (or other agreed percentage) agree to do both of the following: agree in writing to continue the LP business; and, to the extent they desire, or if there are no remaining general partner,s agree to appoint a new general partner(s)
Why do general partners generally provide only the required information on the limited partnership certificate (or certificate of formation in TX)
because the certificate is a public document; and, because changes would necessitate later amendments to the certificate
TX law: examples of safe harbor activities by limited partner that do not constitute control
being a contractor, agent, or employee of the LP consult with and advise a general partner regarding the business requesting, attending, or participating in a partners' meeting proposing one or more of the following: dissolution and winding up of the business; sale, lease, or transfer of all or substantially all of the LP's assets; admission or removal of a general or limited partner; amendment to the partnership certificate or agreement
limited partnership (LP)
business entity created in accordance with state statutes that has 1 or more general partners and 1 or more limited partners, with limited partners having limited liability but no participation in the management of the business
TX form for amending the limited partnership agreement
certificate of amendment, form 424
role of paralegal with respect to limited partnerships
check name availability for the entity and any required signals draft and file the certificate of formation -limited partnership draft the LP agreement File applications to do business in foreign jurisdictions (states other than state of formation), if desired monitor changes in the LP, file amendments to Certificate of Formation, or file Certificate of Termination - Domestic Entity, if needed
winding up. In TX, the LP must wind up by accomplishing the following:
collect LP assets pay creditors make any outstanding distributions to partners and former partners return contributions to partners distribute profits to the partners in accordance with the LP agreement
to avoid personal liability of a general partner, LPs often have a corporation serve as the general partner, because...
corporation as a general partner manages the business through its directors and officers; under corporate law, individual owners of corporations (shareholders) have no personal liability; therefore, creditors of the LP can reach only the assets in (1) the LP's accounts and (2) the corporate general partner's accounts. No individuals will have personal liability
general partners in a limited partnership have joint and several liability for
debts and contractual obligations of the business sole proprietor's own wrongdoing also wrongdoing by employees committed in the course and scope of employment (disadvantages)
nonjudicial dissolution
dissolution without the court's involvement
foreign limited partnerships
domestic limited partnership; foreign limited partnership
purpose of providing general partners' names and addresses on limited partnership certificate/TX certificate of formation
enable potential limited partners, since they do not participate in the control of the business, to perform their due diligence
doing business
engaging in activities enumerated by a state that require the LP to qualify before entering the state to transact business
limited partnership governing law - federal laws
federal income tax laws, anti-discrimination laws, OSHA regulations, etc.
franchise tax
fee or tax imposed by a state for the privilege of conducting business in the state
duties owed by general partners
fiduciary duty to limited partners and to the LP management duties, which are usually set forth in the LP agreement; otherwise, all general partners share management responsibilities equally general partner is an agent of LP who can bind LP for obligations
to do business in TX, foreign LPs must
file an Application for Registration of a Foreign Limited Partnership (form 306)
In TX, after winding up, LP accomplishes dissolution by
filing Certificate of Termination of a Domestic Entity (form 651); LP must also withdraw registration in any other states in which it was registered to do business
limited partnerships' formation
filing entity (disadvantage because more costly and complicated to form)
limited partnership type of entity (filing/non-filing)
filing entity; that is, they do not legally exist until the required paperwork is filed with the secretary of state and the appropriate fee is paid
a limited partnership is a filing entity, meaning...
for it to have legal existence, a limited partnership certificate must be prepared, signed, and filed with the secretary of state (or equivalent official) of the state of the partnership's organization
effect of failing to file appropriate application or certificate in other state
foreign LP will be precluded from maintaining any lawsuit in that other stat until the defect or omission is cured
limited partnership transferability of interest
general or limited partner may transfer or assign her "partnership interest" (or "interest in the partnership") at any time without consent of other partners
2 tiers of partners in a limited partnership
general partners; limited (silent) partners
how easy is it for a limited partner to transfer his or her interest in LP
generally these interest ore readily transferable
state taxation of limited partnership
in TX, must pay franchise tax
unless limited partnership agreement provides otherwise, how do partners share profits and losses under RULPA?
in proportion to their capital contributions
if the limited partnership agreement is silent on the issue of profits and losses, how are they allocated under RULPA?
in proportion to their contributions to the partnership
if a limited partner's name appears in LP's name
in some states, limited partner's liability can go from "limited" to full" because it otherwise may give 3rd parties the impression that he or she is a general partner with unlimited personal liability
limited (silent) partners
invest in the business but do not participate in controlling it. In exchange for giving up control, they have no personal liability (beyond what they invested in the business)
due diligence
investigate the background of the general partner(s) before joining the LP as a limited partner
disadvantages of limited partnership ownership
investors who prefer to manage their own investments cannot do so without losing limited liability status because general partner(s) has full authority to manage the business, limited partners must have complete confidence in him or her
unless LP agreement provides otherwise
limited or general partner who assigns all of her partnership interest will, upon majority-in-interest vote of all other partners, cease to be a partner; general partners' assignment of all of her partnership interest constitutes event of withdrawal, usually requiring winding up of LP business
limited partner's personal liability can go from "limited" to "full" if
limited partner exercises control over the business because controlling the business may give 3rd parties the impression that he or she is a general partner with unlimited personal liability
TX - filing options for certificate of formation
mail fax online through TX SoS online business service called SOSDirect
permissible business activity of a limited partnership
must be for-profit business and legal
In TX, LLP registration
must be renewed annually by filing annual reports and paying annual fees
limited partnership name
must not be deceptively similar to those of other businesses; must include word(s) "Limited" or "Limited Partnership" or an abbreviation of one of the 2; In some states, may not include the limited partner's name unless 1. that name is also that of general partner; or 2. the business operated under that name before the limited partner's admission
drafting limited partnership agreement
need not be in writing, but writing is preferable; very similar to general partnership agreements where LP agreement is silent, Revised Uniform Limited Partnership (RULPA) fills in missing terms (except in Louisiana)
In TX, obligation of the partnership means
negligence or wrongdoing of another partner; and obligations of the LLP itself, including contracts
reason for waning popularity of LPs today
new business entities (e.g., LLPs and LLCs) allow protection from personal liability yet still allow their partners with such protection to engage in management
exception to "nonjudicial dissolution" trigger: the last limited partner withdraws from the LP
no later than 1 year after the last limited partner withdraws, either: the legal representative or successor of last remaining limited partner and all general partners agree to: continue the LP business; and, admit legal representative/successor (or that person's nominee or designee) to LP as a limited partner, effective as of the date of the event causing the last remaining limited partner to cease being so; or LP admits limited partner per LP agreement, effective as of date causing last remaining limited partner to stop being so
TX - Amended certificate of formation must be filed when
no later than 30 days after any of the following occurs: admission of a new general partner withdrawal of a general partner change of LP's name; or change of LP's registered address or registered agent
does transferee or assignee automatically become partner in the LP?
no, he or she is not automatically entitled to participate in the management of the partnership
2 types of dissolution
nonjudicial dissolution; judicial dissolution
In Texas, must the dissolution date be stated on the certificate of formation?
not required
purpose of specifying general partners' rights and duties in th LP agreement
notify limited partners of his or her management obligations
management of limited partnership
only general partners can participate in management.
limited (silent) partner
partner in a LP who is a passive investor, who does not participate in controlling the business
general partner
partner in a LP who is fully responsible for managing the business and has unlimited personal liability
federal taxation of limited partnership
pass-through
limited partnership federal income taxation advantage
pass-through tax status
exception to "nonjudicial dissolution" trigger: all partners voluntarily consent to dissolution in writing
prior to filing a certificate of termination with secretary of state, all remaining partners (or other group or percentage of them specified in the agreement) agree in writing to revoke the voluntary decision to wind up and continue the business of the limited partnership
special concerns for limited partnership agreements
profits and losses rights and duties of general partner(s) admission of new general and limited partners withdrawal of limited partners
purpose of dissolution date
provide notice to limited partners so that they will know when final distributions may be made
registered agent for service of process
receives suit papers on behalf of LP
limited partnership agreement
required - oral, written, or implied
partnership interest (or interest in the partnership)
rights to profits and distributions
general partners
run the business and have all the liability of partners in a general partnership; and
how are profits and losses normally allocated in most LP agreements
shared in proportion to the partners' respective contributions to the LP
2 entity types covered in this course that are non-filing entities
sole proprietorship; general partnership
a general partner must amend certificate of formation if partner becomes aware of
the certificate contains a statement that was false when made; or a matter set forth in the general certificate has changed, making the certificate materially false
what is a limited partner entitled to receive upon withdrawal from the limited partnership?
the fair value of his or her interest in the LP as of the date of withdrawal
Limited partnerships are governed by
the law of the state in which they are formed
LP can cancel the event of withdrawal if
there remains at least 1 general partner, and the agreement allows continuation of the business; or, within a year after withdrawal, all remaining partners agree in writing to continue the business and, to the extent desired or if no general partner remains, agree to appoint a general partner
limited partnerships do not necessarily dissolve upon withdrawal of a limited partner because
they do not control the business (although returning their capital may force LP out of business if it cannot find replacement funds or continue running the business without them)
to whom would limited partner be personally liable if he or she participated in the control of the business
to those persons who transacted business with the LP reasonably believing the limited partner was a genearl partner
True or false? The names and addresses of all general partners must appear on the Certificate of Formation
true, but not the names of any limited partners
who can own a limited partnership
two or more human beings or other business entities (e.g., partnerships or corporations)
extent of personal liability of general partners
unlimited joint and several personal liability for LP's debts and obligations
advantage of management of limited partnership
very flexible
advantages of ownership of limited partnership
wealthy people can invest money in the enterprise knowing in advance their maximum exposure is limited to the amount of their contributions if additional capital is needed, new limited partners can be admitted to the partnership without the general partners' surrendering any of their ability to manage the business as long as a limited partner does not participate on control of the business or knowingly allow his or her name to be used in the business name, he or she will not be liable for any amount beyond his or her contributions to the business
foreign limited partnership
when an LP is formed in one state but does business in another state, it is known as this in any other state besides the one in which it was formed
domestic limited partnership
when an LP is formed in one state but does business in another state, it is known as this in the state of formation