Limited Partnerships (LP) - July 19

Question 1

In a limited partnership, what are the two types of partners? (Q)

Answer 1

In a limited partnership, the two types of partners are: (1) general partners and (2) limited partners. A limited partnership has at least one general partner, who has an ownership stake and manages the partnership, and at least one limited partner, who has an ownership stake but typically does not manage the partnership. General partners are personally liable for partnership obligations, while limited partners typically are not.

Question 2

What is the Uniform Limited Partnership Act (ULPA)? (Q)

Answer 2

The ULPA, created in 1916 and most recently amended in 2013, is an act addressing issues pertaining to limited partnerships. In its most recent iteration, the ULPA provides management and operational flexibility as well as vicarious liability protections for partners. Its most widely adopted earlier iteration, referred to as the Revised Uniform Limited Partnership Act (1976) (RULPA), provided less flexibility and partner protection. Some states have adopted the most recent act, while others still use the earlier act.

Question 3

Under the ULPA, can a limited partner be held liable for partnership debts if the limited partner participates in the management and control of the limited partnership? (Q)

Answer 3

No. Under the ULPA, a limited partner cannot be held liable for partnership debts even if the limited partner participates in the management and control of the limited partnership. Moreover, under the ULPA, limited liability limited partnership status is expressly available to provide a full liability shield to all general partners.

Question 4

Are limited partners allowed to participate in managing a limited partnership? (Q)

Answer 4

Yes. Limited partners are allowed to participate in managing a limited partnership, but they do not typically do so. Rather, limited partners usually only make capital contributions and share in profits, and general partners manage the limited partnership.

However, limited partners who participate in management of the partnership risk personal liability for some or all of the partnership’s obligations based on their status as a partner in states that retain the RULPA control test.

Question 5

In order to form a limited partnership, what information does the ULPA require? (Q)

Answer 5

In order to form a limited partnership, the ULPA requires that a certificate of limited partnership filed with the state contains:

the limited partnership’s name,

the mailing address of the partnership’s principal office,

the registered agent’s name and mailing address,
the names and mailing addresses of each general partner, and

whether the limited partnership is a limited liability partnership.

Although the certificate may contain additional information, it may not omit any of the required information.

Question 6

Under the ULPA, may a state provide information about a limited partnership to a person who requests it? (Q)

Answer 6

Yes. Under the ULPA, if a person requests it, the state must issue a certificate of good standing for a limited partnership. The certificate must disclose the following information:

the limited partnership’s name;

that a certificate of limited partnership has been filed and has taken effect;

the effective date of the certificate;

the period of the partnership’s duration if the records reflect that its period of duration is less than perpetual;

that no statement of administrative dissolution or statement of termination has been filed and the records do not otherwise reflect that the partnership has been dissolved or terminated or is in dissolution proceedings,

that all fees, taxes, interest, and penalties owed to the state by the limited partnership have been paid; and

that the most recent report required by the state has been filed.

Question 7

What are the rights and duties of a general partner in a limited partnership? (Q)

Answer 7

A general partner in a limited partnership has the same rights and duties as a partner in a general partnership. That is, the general partner participates in the management and conduct of the partnership business. General partners remain jointly and severally liable for the obligations of the partnership and are not limited in their individual liability.

Question 8

What are the duties and rights of a limited partner in a limited partnership? (Q)

Answer 8

A limited partner in a limited partnership makes capital contributions and is entitled to a share of the profits. Limited partners generally do not participate in the management and conduct of the partnership business. However, under RULPA, limited partners are permitted to participate in management of the partnership. Limited partners who participate in management of the partnership risk personal liability for some or all of the partnership’s obligations based on their status as partner. This phenomenon is frequently described as the control test. The ULPA rejects the control test. Under the ULPA, a limited partner is not personally liable for the partnership’s obligations solely because she is a limited partner who participates in management.

Question 9

What is the RULPA control test? (Q)

Answer 9

The RULPA control test provides that limited partners who participate in management of the partnership risk personal liability for some or all of the partnership’s obligations based on their status as partner. The ULPA rejects the control test. Under the ULPA, a limited partner is not personally liable for the partnership’s obligations solely by reason of being a limited partner who participates in management.

Question 10

Can limited partners who help manage a limited partnership face personal liability based on their status as a partner in some jurisdictions? (Q)

Answer 10

Yes. In jurisdictions that have adopted the RULPA, if a limited partner helps manage a limited partnership, then that limited partner risks personal liability for some or all of the partnership’s obligations under the control test. The control test looks at whether the limited partner exercised any control over the limited partnership and whether the injured party reasonably believed the limited partner was actually a general partner.

However, the ULPA rejects the control test. In jurisdictions that have adopted the ULPA, a limited partner is not personally liable for the partnership’s obligations solely because the limited partner participated in managing the limited partnership. Limited partners can still face personal liability for their own misconduct.

Question 11

A limited partnership had one general partner and one limited partner. The partnership experienced some financial distress and the limited partner decided to start helping the business. The limited partner began attending all officer meetings and reviewing all proposals. The limited partner then began making key operational and finance decisions. Unfortunately, the limited partner’s decisions accelerated the partnership’s demise. The partnership’s creditors wanted to treat the limited partner as a general partner and sue the limited partner in her personal capacity for any unpaid claims.

If the creditors have a choice of suing in jurisdiction that has adopted the RULPA or one that has adopted the ULPA, which jurisdiction will allow the creditors to sue the limited partner in her personal capacity for the unpaid debts? (Q)

Answer 11

To sue the limited partner in her personal capacity for the unpaid debts, the creditors should sue in the RULPA jurisdiction. Generally, limited partners do not manage the partnership’s business and are not personally liable for its debts. Under the RULPA, limited partners are allowed to participate in managing the business, but they risk personal liability for the partnership’s obligations. This is commonly known as the control test. The ULPA rejects the control test. Under the ULPA, a limited partner is not personally liable for the partnership’s obligations solely by reason of participating in management.

Here, the limited partner helped manage the business. Under the ULPA, this is not enough to make the limited partner personally liable for the unpaid debts. However, under the RULPA, the limited partner’s participation could make her personally liable for any unpaid debts.

Question 12

What partnership rights do limited partners have? (Q)

Answer 12

In addition to being entitled to a share of the profits, limited partners generally have a right to information that permits, during regular business hours, the inspection and copying of required information, as well as information regarding the limited partnership’s activities and financial condition. Additionally, a limited partner has the right to withdraw from the limited partnership by notice of her express will to do so and to transfer her interest in the limited partnership, including her rights and obligations as a limited partner, to another person.

Question 13

What is the individual liability of partners in a limited partnership to third parties? (Q)

Answer 13

In a limited partnership, the individual liability of limited partners to third parties is limited to the amount of the limited partners’ respective capital contributions. A general partner who converts to a limited partner remains liable for any obligation incurred by the partnership before conversion, as well as obligations incurred after conversion if the other party to the transaction reasonably believes that the limited partner is a general partner.

Question 14

If a general partner in a limited partnership mistakenly believes she is a limited partner, is she typically liable for the partnership’s obligations? (Q)

Answer 14

No. A general partner in a limited partnership who mistakenly believes she is a limited partner is not typically liable for the partnership’s obligations if, after discovering the mistake, she (1) files an appropriate amendment or statement with the state or (2) withdraws from the partnership and makes the required filings. However, the general partner can be personally liable to a creditor who, prior to the partner filing the appropriate amendment or statement, makes an investment or extends credit to the partnership believing, in good faith, that the person is a general partner.

Question 15

A wealthy partner of a limited partnership believed he was a limited partner, but he was listed as a general partner in the certificate of limited partnership. A marketing firm prepared the partnership’s fall catalog. Since the wealthy partner was listed as a general partner in the certificate of limited partnership and general partners can be personally liable for a partnership’s debts, the marketing firm decided the risk of the partnership’s non-payment was low and agreed to allow the partnership up to 90 days to pay for the catalog. A few weeks later, the wealthy partner realized the error in the certificate of limited partnership and quickly filed an appropriate amendment changing his status to limited partner. The partnership became insolvent and was unable to pay the firm.

Can the wealthy partner be held personally liable to the marketing firm for the partnership’s debt to the firm? (Q)

Answer 15

Yes. The wealthy partner can be personally liable for the partnership’s debt to the firm. Typically, a general partner who mistakenly believes that he is a limited partner is not personally liable for the partnership’s obligations if, once he discovers the mistake, he files the appropriate papers to change his status. However, even if a person files the appropriate papers, he can still be personally liable to a creditor who transacted with the partnership: (1) before the papers were filed and (2) believing in good faith that the person was a general partner.

Here, once he realized his mistake, the wealthy partner filed papers and became a limited partner. However, the marketing firm extended credit to the partnership: (1) before the filing and (2) in reliance on the partner’s status as a general partner. Thus, the wealthy partner can still be personally liable to the firm for the debt.

Question 16

If unaddressed by a limited-partnership agreement, how are a limited partnership’s profits and losses distributed? (Q)

Answer 16

If unaddressed by a limited-partnership agreement, a limited partnership’s profits and losses are distributed to partners based on their contributions to the partnership. Partnership agreements frequently address how profits and losses are distributed. However, if a limited-partnership agreement fails to address this issue thoroughly or does not exist at all, both the RULPA and the ULPA provide that profits and losses are allocated based on the partners’ contributions.

Question 17

A limited partnership had one general partner and two limited partners. The senior limited partner made a $200,000 capital contribution, and the junior limited partner made a $100,000 capital contribution. The general partner did not contribute any capital to the venture. There was a limited partnership agreement, but this agreement did not address how the partnership’s profits and losses would be distributed. The partnership had $450,000 in profits for the year.

How should the profits be allocated to each partner? (Q)

Answer 17

The profits should be allocated to each partner based on that partner’s contributions to the partnership. Partnership agreements often address how profits and losses are distributed. However, if a limited-partnership agreement fails to fully cover the issue or does not exist at all, under both RULPA and ULPA., the partnership’s profits and losses are allocated to partners based on their contributions.

Here, the partnership agreement did not address how to distribute profits and losses, and the profits should be allocated based on the partners’ contributions. The senior limited partner made two-thirds of the contributions and should receive two-thirds of the profits, or $300,000. The junior limited partner made one-third of the contributions and should receive one-third of the profits, or $150,000. The general partner did not contribute anything and should not receive anything.

Question 18

May a limited partnership be dissolved? (Q)

Answer 18

Yes. A limited partnership may generally be dissolved or terminated in the same manner as a general partnership. Typically, the general partner is responsible for winding up the limited partnership, including entering into transactions and incurring liabilities necessary to wind up the business. Additionally, a limited partnership may be converted to a general partnership with the approval of all partners and the cancellation of the certificate of limited partnership.

Question 19

Under the ULPA, will a limited partner who withdraws from the partnership prior to the termination of the partnership be liable for damages caused by the withdrawal? (Q)

Answer 19

Yes. Under the ULPA, limited partners who withdraw from the partnership prior to the termination of the partnership are liable for damages caused by the withdrawal. This is the opposite of the RULPA rule. Under the ULPA, unless otherwise allowed by the partnership agreement, a limited partner cannot dissociate from a limited partnership. A limited partner who wrongfully dissociates is liable to the partnership for damages caused by the withdrawal.

Question 20

Under the RULPA, are limited partners who withdraw from the partnership prior to the termination of the partnership liable for damages caused by the withdrawal? (Q)

Answer 20

No. Under the RULPA, limited partners who withdraw from the partnership prior to the termination of the partnership are not liable for damages caused by the withdrawal. This is the opposite of the ULPA rule. Under the RULPA, partners can withdraw from a limited partnership upon the occurrence of an event listed in the partnership agreement that allows for withdrawal. Even if the partnership agreement does not list an event that allows for withdrawal, under the RULPA, a limited partner can withdraw upon no less than six months’ prior written notice and will not be liable to the partnership for damages caused by the withdrawal. However, some jurisdictions that adopted the RULPA have modified or not adopted the six-month provision.