Limited partnerships Flashcards
What is a Limited Partnership?
Limited partnerships are used to provide the flexible advantages of a partnership while allowing passive investors to avoid unlimited liability for the obligations incurred by the operating partners
The general partner continues to be subject to unlimited liability
Limited partnership is a statutorily created method of profit sharing by passive investors
What are the classes of partners in an LP?
(1) 1 or more general partners, who may have complete control, manage the enterprise, and are subject to full liability. A limited partnership must have at least 1 general partner.
(2) 1 or more limited partners, who are very similar to firm creditors but are subordinated to creditors if the firm becomes insolvent or liquidated. They do not take part in the day-to-day control of the business.
How is an LP formed?
Limited partnership is formed only by complying with statutory formalities
A verified certificate must be filed with the clerk, recorder, or other designated public official of the county in which the limited partnership’s principal place of business is located and sometimes must also be filed in other counties in which it has places of business
Are limited partners agents of the partnership?
Limited partners are not ordinarily agents of the partnership and thus don’t have the authority to bind the partnership simply because of their position
Do partners in an LP owe fiduciary duties to the partnership?
General partners owe fiduciary duties to limited partners as managers of the business
Limited partners who take an active role in the business will incur the same fiduciary duties as general partners
Can exercising control in the business expose a limited partner to unlimited liability?
RULPA § 303(b) creates safe harbors for activities that will not expose a limited partner to unlimited liability participating in the control of the business
This concept means that such activities are protected, but it does not mean that all other activities will result in liability; the court must examine the activity and make an independent decision on whether liability should attach because the activity constitutes participation in control.
Must the general partner in an LP be an individual?
The general partner could be a corporation and limited partners would not incur liability for participating in the management of the business as an officer, director or shareholder of the corporate general partner
Burden is on the limited partner to show that their participation in the control of the limited partnership’s business was in their capacity as corporate officers rather than as limited partner
Reasons for selecting the limited partnership
Centralized management and an effective way of limiting the influence of the limited partners
More suitable for public trading
Business judgment rule
A legal presumption that the directors and officers of the corporation have exercised due care by acting on an informed basis, in good faith, and in the honest belief that their actions are in the best interests of the corporation.
Must you have an agreement to form a partnership?
No. You can have an agreement or just choose to abide by the partnership statutes.
You can alter terms of the statutes in the agreement subject to exceptions in 8103 (duty of loyalty). Whatever you don’t cover in the agreement will be controlled by the statutes.
Agent for service of process
A LP must maintain in the state an agent for the service of process. It may change its agent by filing a statement with the DOS. An agent can resign by filing a statement with the DOS and mailing a statement to the principal office of the pship.
Dual capacity
A person can be both a general partner and a limited partner; he is subject to the obligations, duties, and restrictions of a general partner when he acts as a general partner, and those of a limited partner when he acts as a limited partner.
General partner’s liability
Jointly and severally liable for all obligations of the LP.
A person who becomes a GP of an existing LP is not personally liable for preexisting obligations. Provisions regarding actions against a GP are similar to those of a general partnership.
Limited partner’s liability
A limited partner is not personally liable for an obligation of the limited partnership solely by reason of being a limited partner, even if the limited partner participates in the management and control of the LP.
General and limited partners have the following rights:
- To share in distributions,
- To transfer their right to distributions,
- To transact business with the pship,
- To apply for dissolution when it is not reasonably practicable to carry on business, and
- To maintain a director or derivative action against the LP
