Limited Partnerships
Limited Partnerships are becoming less and less significant, considering the rise of LLPs and LLCs. However, there are still some large businesses (and often family partnerships) that are formed as an LP.
Formation
A LP is formed by filing a “certificate of limited partnership” with the Secretary of State that includes certain details about the business (business name, address, names of general partners).
Governing Law
The law that governs the LP are the statutes passed within the state the LP is formed in. Most states have adopted some version of the Uniform Limited Partnership Act (ULPA), which is the LP version of RUPA. Just like RUPA, the ULPA usually consists of default rules which can be adjusted by the partnership agreement.
Management
The general partners have the management rights to make decisions for the business. The limited partners have ownership rights, but make no influence on business decisions. The exception to this rule is if the general partners wish to dispose of partnership property (by amending the partnership agreement) the partners need to have a approval of the limited partners.
The friction here is that general partners want discretion and limited partners want to limit that discretion. The question is how do the limited partners limit that discretion when they have no controlling vote.
Liability
The general rule is that the general partners are liable while the limited partners have a liability shield. However, limited partners may become liable if they participate in the decision making process for the partnership. General partners also get around the liability problem by assigning an entity, usually a LLC, as the general partner. Thus, both the general and limited partners have a liability shield (the general partners through the LLC). Most of the time, a limited partnership is not a selected business format because the liability can be expensive.
Duties and Obligations
The duties and obligations of the limited partnership are similar to the general or limited liability partnerships. That is, there is both the duty of loyalty and care. Additionally, there is the obligation of good faith.
The general parties owe these duties and obligations to the limited partners (the limited partners by default do not have these duties). The way to remember this is to determine if anyone has the ability to make a decision alone, then those entities have a fiduciary duty. Thus, in a LP, the general partner has a fiduciary duty to the partnership and the limited partners.
In the ULPA, this duty can only be limited, but not eliminated. However, in Delaware, then these duties can be eliminated. However, you cannot eliminate the obligation of good faith and fair dealing. The challenge here is determining the fine line between duties and obligations (when do you cross into obligation territory instead of just a duty).
Transferring Interest
The default rule is that limited partners cannot transfer their interest except for their rights to collect dividends. This is often amended in a partnership agreement though because the amendment does not adversely affect the general partners.
Profit and Loss Allocation
There is no requirement to allocate profits. However, most partnership agreements have a provision that allocate dividends to help the partners pay taxes. See § 503.
Buyout Rights
Unlike the default RUPA rule, a dissociation of a partner does not trigger buyout rights. § 602(a).
Limited Liability Limited Partnership
The main distinction between a LP and LLLP is that the LLLP provides a liability shield for all the partners, general and limited.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
