Chapter 35: Limited Partnerships and Special Partnerships (limited liability limited partnerships)

order of distribution of assets of a limited partnership

(1)creditors of the limited partnership (2) partners with respect to (a) unpaid distributions (b) capital contributions (c) the remainder of the proceeds

general partner

invest capital, manage the business, and are personally liable for partnership debts and obligations

limited partners

invest capital, but do not participate in management and are not personally liable for partnership debts beyond their capital contributions

Share of profits and losses

-agreements many specify how profits and losses are to be allocated among the general and limited partners -if not specified, RULPA provides that profits and losses are shared on the basis of value of the partner's capital contribution (in line with their voting

Limited Partnership

-at least one general partner and one limited partner -no restrictions on maximum number of general or limited partners -any person may be a general or limited partner or could be both

Permissible activities of limited partners

-being an agent, employee, or contractor of the partnership -acting as surety for the partnership -being a consultant or advisor to a general partner regarding the limited partnership -approving or disapproving an amendment to the partnership agreement -voting on other partnership matters, including dissolution removal of general partner, change in the nature of the business, the incurrence of indebtedness by the limited partnership other than in the ordinary course of business, and the sale, transfer, exchange, lease or mortgage of substantially all of the assets of the limited business

capital contributions

-contribution may be in cash, property, services rendered or promissory notes or other obligations to contribute cash, property or to perform services -partner or creditor may bring lawsuit to enforce promise to make contribution

Limited partnership agreement

-document that sets forth the rights and duties of general and limited partners -terms and conditions regarding operations, termination and dissolution of partnership -can state which transaction must be approved by which partners (general, limited or both)

causes of dissolution

-end of life of limited partnership -written consent of general and limited partners -withdrawal of general partner (death, retirement, bankruptcy, adjudged insanity or removal of a general partner or the assignment by a general partner of his or her partnership interest) -entry of decree of judicial dissolution

management of a limited partnership

-general partners have management rights -limited partners give up these rights in exchange for limited liability -liable as general partner if participation is substantially the same -only liable to persons who reasonably believe them to be general partners

Liability of general and limited partners

-general partners have unlimited liability for debts and obligations of the partnership -limited partners are liable only up to their capital contributions -creditor may enforce personal guarantee and recover payment from limited partner who guaranteed repayment of loan

Liability of limited partners - exceptions to the general rule

-limited partners are individually liable for the debt, obligations, and tortious acts of the partnership in three situations: 1. defective formation 2. participation in management 3. personal guarantee

Foreign Limited Partnership

-limited partnership in all other states besides the one in which it was formed -law of the state governs ints organization, internal affairs and partners' liabilities -for business transactions, a certificate of registration is required

Revised uniform limited partnership act (RULPA)

-modern comprehensive law for the formation, operation, and dissolution of limited partnerships -supersedes the uniform limited partnership act (ULPA) -provides basic foundation for limited partnership law

admission of a new partner

-new limited partner can be added only upon the written consent of all partners (agreement can provide otherwise) -new general partner can be admitted only upon written consent of each partner (agreement cannot vary this requirement) -admission effective after amendment is filed

winding up of a limited partnership

-partnership must wind up (the process of liquidating the assets of a business and distributing the proceeds to satisfy claims against the business) its affair upon dissolution -affairs may be wound up by general or limited partners who have not acted wrongfully (general first; if none than limited) -partner may petition the court to wind up the affairs

forms of business associations

-sole proprietorship -general partnership -joint venture -limited partnership -limited liability company -limited liability partnership -limited liability limited partnership -corporation -business trusts

Two Types of Partners

General or limited a limited partnership must have one or more general partners and one or more partners. There are no upper limits on the number of general or limited partners allowed in a limited partnership. Any person - including natural persons, partnerships, limited partnerships, trusts, estates, associations and corporations - may be a general or limited partner. A person may be both a general partner and a limited partner in the same limited partnership

participation of limited partners in management

Section 303 of the RULPA - permits limited partners to participate in the management of a limited partnership and retain their limited liability shield -the limited liability partnership agreement can permit certain or all limited partners a say in how the partnership's business should be run

Dissolution of a limited partnership

The change in the relationship of partners caused by any general partner ceasing to be associated in the carrying on of the business certificate of cancellation must be filed upon dissolution of limited partnership the partnership is not dissolved if (1) the certificate of limited partnership permits the business to be carried on by the remaining general partner or partners or (2) within 90 days of the withdrawal, all remaining partners agree in writing to continue the business (and select a general partner or partners, if necessary)

certificate of cancellation

a certificate that must be filled with the secretary of state upon the dissolution and the commencement of the winding up of a limited partnership

certificate of registration

a formal document that must be issued by the secretary of state before a foreign limited partnership may conduct business in that state

personal guarantee

a guarantee given by a limited partner of a limited partnership, a partner of a limited liability partnership, a member of a limited company, a shareholder of a corporation and other whereby they guaranty that if the business does not repay a loan or debt or obligation then they will pay the unpaid amount

domestic limited partnership

a limited partnership in the state in which it is organized

Master limited partnership

a limited partnership whose interests are traded on organized securities exchanges -an investment in an MLP is liquid as it can be sold on the stock exchange -pay their investors quarterly (quarterly required distributions (QRDs); required distributions at an amount stated in the investment contract (tax benefits) -shares of ownership in MLPS are referred to as units -may only engage in certain business, such as petroleum and natural gas extraction, businesses involving pipelines for the transportation of natural resources, financial services and some real estate enterprises. -in most MLPs a corporation remains the general partner of the MLP, and public investors are the limited payments on bonds, at an amount stated in the investment contract -tax benefits: combine the liquidity of publicly traded securities and the tax benefits of limited partnerships

Uniform Limited Partnership Act (ULPA)

a model act that provides comprehensive and uniform laws for the formation, operation and dissolution of limited partnerships

decree of judicial dissolution

an order issued by a court when it judicially dissolves a partnership, corporation or other business entity

right to information

each limited partner has right to obtain full information regarding state of business, finances, etc -partnership must keep the following records: -certificate and all amendments -full names and addresses of each partner -written limited partnership agreements -all income tax returns -three years of financial statements

Liability of Limited Partners - General Rule

limited partners are not individually liable for the obligations or conduct of the partnership beyond the amount of their capital contribution

Name of limited partnership

name may not include surname of limited partner unless: -it is also surname of general partner -business was carried on under that name before admission of limited partner other restrictions: -should not be the name of other corporations -states can designate words that cannot be used in limited partnership names -name must contain the words, "limited partnership" ex. Deloitte Tax, LLP Lumen Research, LLP

Defective Formation

occurs when: (1) certificate not properly filed (2)defects in certificate that is filed or (3) other statutory requirement for creation of limited partnership is not met -in cases of such defects, limited partners may be liable as general partners -can escape liability by (1) causing the appropriate certificate of limited partnership (or certificate of amendment) to be filed or (2) withdrawing from any future equity participation in the enterprise and causing a certificate showing this withdrawal to be filed.

distribution of assets

proceeds must be distributed after the assets of the limited partnership have been liquidated

Limited Liability Limited Partnership (LLLP)

special type of limited partnership that has both general partners and limited partners where both the general and limited partners have limited liability and are not personally liable for the debts of the LLLP -organized under state law by filing articles of LLLP with the secretary of state's office -not personally responsible for debts of the LLLP -general partners have management responsibility of the LLLP (permits limited partners to participate in the management without losing their limited liability shield) -permissable under Uniform Limited Partnership Act (2001) or re-RULPA

certificate of limited partnership

the creation of a limited partnership is formal and requires public disclosure. -a document that two or more persons must execute and sign that makes a limited partnership legal and binding and that must be filled with the secretary of state of the state organization contents of the certificate: -name and business address of each general and limited partner -name, character, and place of business -amount of cash, property, or services -latest date of dissolution

limited liability of limited partners (limited liability)

the liability of limited partners of a limited partnership is limited to their capital contributions to the limited partnership; limited partners are not personally liable for the debts and obligations of the limited partnership

unlimited personal liability of a general partner (unlimited liability)

the personal liability of general partners of a general partnership or a limited partnership for the debts and obligations of the partnership -general partners have unlimited personal liability for the debts and obligations of the limited partnership. the liability extends to debts that cannot be satisfied with the existing capital of the limited partnership

control rule

under RULPA, a limited partner is liable as a general partner if the partner's participation in the control of the business is substantially the same as that of a general partner, but the limited partner is liable only to persons who reasonably believed the limited partner to be a general partner. This is called the control rule. RULPA permits a limited partner to retain the shield if they are hired by the partnership to be an executive of the partnership Control Rule: a rule that provides that a limited partner who takes part in the management of the affairs of the limited partnership and who has not been expressly elected to office to do so, loses their limited liability shield and become general partners and are personally liable for the debts and obligations of the limited partnership