Chapter 4 – Limited Partnerships

Concepts

• Limited Partnerships – Business entity created in accord with state statutes that provides limited liability to some of its members, called limited partners
  • Limited Partner:  A member of a limited partnership who does not participate in managing the business and whose liability is limited to amount invested in the business
  • General Partner:  Member in a limited (or general) partnership who manages and controls the business and has unlimited personal liability
  • RULPA – RULPA is the Revised Uniform Limited Partnership Act; the model for limited partnership legislation in most states
• Advantages of Limited Partnerships
  • Ideal way of attracting capital
  • Limited liability for limited partners
  • Easy transferability of partnership interest for limited partners
  • Continuity of existence—do not necessarily dissolve upon the withdrawal of a general partner
  • Pass-Through Taxation
  • Lack of control for limited partners
  • Unlimited liability for general partner
  • Formalities and expenses of organization—there are filing fees and legal fees, and the paperwork can be complex
• Formation of Limited Partnership
  • A limited partnership certificate must be prepared, signed, and filed with the secretary of state (or equivalent official) in the state of the partnership’s organization.
• Elements of a Limited Partnership Agreement
  • Limited partnership agreement is very similar to a general partnership agreement.
  • Includes basic information such as the name of the partnership, its purpose, duration, address, need for additional contributions, identification of all partners and their initial contributions. 
  • Special items to be considered include:
    • Profits and losses
    • Rights and duties of general partner
    • Admission of new general and limited partners
    • Withdrawal of general partners
    • Withdrawal of limited partners
• Transferability of Limited Partnership Issues
  • A limited or general partner’s interest in the partnership is assignable in whole or in part.
  • No permission for such a transfer is required from any partner.
  • Thus, a limited or general partner may easily transfer interest in the partnership to another.
  • The assignment does not automatically entitle the assignee to become a member of the partnership—depends on the terms of the limited partnership agreement.
• Dissolution and Winding Up of Limited Partnership
  • Nonjudicial dissolution (under RULPA §801)
    
    • Expiration of the time specified in the limited partnership certificate
    • Occurrence of events specified in agreement
    • Written consent of all partners
    • An event of withdrawal of a general partner
  • Judicial dissolution:
    • Any partner may apply to a court to dissolve the limited partnership when it is no longer reasonably practicable to carry on the business in conformity with the partnership agreement. (RULPA §802)
• Taxation of Limited Partnerships
  • In general, taxation of a limited partnership is nearly identical to taxation of a general partnership.
  • Thus, all of the income earned by the partnership is “passed through” to the partners, who declare their share of the profits, whether distributed or not, on their own individual tax returns.
• Limited Liability Limited Partnerships
  • Limited Partnership Act of 2001 (2001 Act) has been adopted in 19 jurisdictions.
  • Allow limited partnerships to elect LLLP status and thereby limit the liability of general partners in a limited partnership.
  • Significant provisions of the 2001 Act are as follows:
    • Full liability for general partners
    • Full liability shield for limited partners
    • Use of limited partner’s name
    • Annual report requirement
    • Provides for continuance of limited partnership after a general partner’s withdrawal
• Key Features of Limited Partnerships
  • Must have at least one general partner and one limited partner
  • The general partner in a limited partnership functions identically to and has the same risks as a general partner in a general partnership
  • Limited partners do not have personal liability for the limited partnership’s obligations (so long as they don’t manage the business); their liability is limited to the amount invested in the enterprise
  • Formation of limited partnerships requires filing a Certificate of Limited Partnership with the appropriate state agency
  • Limited partners can generally easily enter and exit the partnership
  • Limited partnership agreement may be oral or written; if no agreement on profits and losses, they are allocated on basis of contributions made by partners
  • Limited partners offer “pass through” taxation, meaning that the entity does not pay tax, but, rather, all income is passed through to the partners who pay at their respective tax rates
  • Under the 2001 Act recognized in 19 jurisdictions, limited partners may manage and control the limited partnership’s business without incurring personal liability, and if the limited partnership elects to be a limited liability limited partnership, the general partner will also be fully shielded from personal liability.