Creation of Limited Partnerships

  • A limited partnership is established by adhering to the relevant state statute, particularly the Uniform Limited Partnership Act (ULPA).

  • The statutory requirements for forming a limited partnership are minimal:

    • A certificate of limited partnership must be created, signed by all general partners, and submitted to the secretary of state.

    • The formation of a limited partnership begins upon the filing of the certificate.

    • The limited partnership can request a Certificate of Existence from the secretary of state, which serves as proof of its existence.

  • Requirements for the certificate of limited partnership include:

    • The address of the partnership

    • The name and address of the registered agent for service of process

    • Names and addresses of general partners

    • The partnership's name must contain "limited partnership," "L.P.,” or "LP" and may include the name of any partner.

  • Typically, a limited partnership is expected to have unlimited duration, although the partnership's agreement can specify a limited duration.

  • The certificate is not required to include crucial details like:

    • Names of limited partners

    • Partners' capital contributions

    • Profit sharing agreements

    • Terms causing dissolution

  • Well-structured limited partnerships generally include these aspects in either the certificate or a companion limited partnership agreement.

Defective Compliance with Limited Partnership Statute

  • The ULPA mandates substantial compliance with its requirements; failure to do so means no limited partnership exists:

    • If there's substantial noncompliance, limited partners may forfeit their limited liability and face unlimited liability concerning the partnership's obligations.

  • Deficiency in compliance may result from:

    • Not filing a certificate of limited partnership.

    • Filing a defective certificate (e.g., incorrect name).

Limited Partners

  • Incidents may arise where individuals mistakenly believe they are limited partners but are classified as general partners or discover that the general partners have neglected to file the certificate. In such cases:

    • These individuals may be held liable as general partners unless they genuinely believed themselves to be limited partners.

    • Upon realizing the misunderstanding, they must:

    1. Cause a proper certificate of limited partnership to be filed,

    2. Withdraw from future equity participation, documented by filing a withdrawal certificate with the secretary of state.

  • The individuals retain liability as general partners to third parties who believed in good faith they were also general partners.

General Partners

  • The ULPA of 2001 does not offer any protection to general partners who mistakenly think an LLLP (Limited Liability Limited Partnership) has been created.

  • A case study, Moser v. Moser, illustrates issues involving tax law compliance and maintaining assets separate from personal accounts, resulting in decisions that affected ownership and tax responsibilities.

Rights and Liabilities Shared by General and Limited Partners

Capital Contributions

  • A partner may contribute various assets:

    • Cash

    • Tangible or intangible property

    • Services rendered

    • Promissory notes

    • Promises for future cash, property, or services

  • Partners must fulfill their promised contributions, enforceable by the limited partnership or its creditors.

Share of Profits and Losses

  • According to the ULPA, profits and losses are divided based on each partner's capital contributions unless a written agreement dictates otherwise.

    • Example:

    • If two general partners each contribute $100,000 and twenty limited partners contribute $2,000,000 each, resulting in profits of $2,010,000:

      • Each general partner’s share of the profits = $5,000

      • Each limited partner’s share = $100,000

  • Partnership agreements frequently designate limited partners to absorb losses up to their capital contributions due to the nature of limited partnerships as tax shelters.

Voting Rights

  • Few actions necessitate unanimous approval of all partners under the ULPA:

    • Amendment of the limited partnership agreement

    • Amendment of the limited partnership certificate

    • Sale or transfer of vital partnership assets

  • The limited partnership agreement may stipulate varying voting rights between general and limited partners.

  • Limited partners have no automatic voting rights; such rights must arise from partner agreements.

Admission of New Partners

  • The default rule under the ULPA forbids the admission of new partners without consent from all existing partners.

    • Limited partnership agreements may include procedures allowing general partners to admit new limited partners without needing consent from existing partners.

  • The agreement may also detail processes for electing new general partners or replacing a deceased/retired general partner.

  • Limited partnership agreements typically do not provide strong grounds for expelling partners.

Partner's Transferable Interest

  • Partners possess a transferable interest that constitutes personal property, allowing them to sell or transfer to others or assign to creditors.

    • Buyers typically only obtain the partner's share of distributions unless the partnership agreement stipulates otherwise or all partners consent to the transfer.

  • The transfer of a partner's interest does not alter their status as a partner by itself unless the agreement dictates different consequences.

Power and Right to Withdraw

  • Partners can withdraw from the partnership at will; however, the expectation is that a limited partnership will persist indefinitely.

  • The ULPA does not intrinsically grant partners a withdrawal right unless specified in the partnership agreement, leading to:

    • No compensation for the value of a partnership interest upon withdrawal unless the agreement states otherwise.

Other Rights of General Partners

  • General partners hold management rights and agency powers similar to those in ordinary partnerships, with express and implied authority to operate in normal business conduct.

  • They typically do not receive compensation beyond their profit share unless agreed otherwise. Limited partnerships often provide for salaries to general partners due to initial financial losses.

Other Liabilities of General Partners

Liability

  • General partners bear unlimited liability for the partnership’s debts, while in an LLLP, their liability caps at their capital investment.

  • General partners can be personally liable for torts committed during business operations, such as causing harm in accident.

Fiduciary Duties

  • General partners owe fiduciary duties to the limited partnership and its partners, including:

    • Accountability for partnership property

    • Non-competition with the partnership

    • Prohibition of self-dealing

  • The ULPA protects general partners from liability unless involved in gross negligence, intentional misconduct, or violations of law.

  • Limited partnership agreements may adjust the fiduciary duties imposed on general partners.

Other Rights of Limited Partners

  • Limited partners retain rights to be informed about partnership activities, given access to financial information, tax returns, and partnership agreements upon request.

Other Liabilities of Limited Partners

Liability

  • Once limited partners fulfill their capital contribution, they generally owe no further liabilities. Under RULPA 1976, active participation by limited partners could lead to liabilities similar to general partners, but the ULPA 2001 provides total liability protection.

Duties

  • Limited partners do not inherently owe fiduciary duties solely by virtue of being partners. They are, however, expected to act in good faith and transact fairly concerning the partnership's interest.

Partners' Dissociations

Limited Partner Dissociations

  • A limited partner dissociates through:

    • Death

    • Withdrawal

    • Expulsion by other partners or courts, which requires a unanimous vote.

  • Circumstances leading to expulsion include transferring all transferable interests or illegal activities.

  • A limited partner no longer holds their status or rights upon dissociation and becomes a mere transferee entitled to receive profits and liquidation value at partnership termination.

General Partner Dissociations

  • General partners dissociate under similar circumstances as limited partners:

    • Occurrences include death, withdrawal, court expulsion, mental incapacity, bankruptcy, or other disqualifying factors.

  • General partners face wrongful dissociation consequences, causing potential liability for damages.

  • Dissociated general partners maintain certain rights with regards to their transferable interests and must notify others of their dissociation to mitigate liability.

Authority and Liability of Dissociated General Partners

  • Dissociation eliminates the management rights of general partners, who may still exhibit apparent authority unless properly notified to third parties.

  • The duty of confidentiality continues after dissociation, obligating protection of the partnership's sensitive information.

Effect of Limited Partnership Agreement

  • Partners may modify the default dissociation rules, including:

    • Stipulations preventing limited partner withdrawals

    • Specifying events leading to dissociation

    • Grounds for partner expulsion

  • The agreement may include provisions for buyouts, detailing triggering events, valuation methods, and payment schedules consistent with the partnership's financial capabilities.

Limited Partnership Dissolutions

  • A limited partnership does not automatically dissolve upon the withdrawal of a partner. The ULPA establishes specific conditions for dissolution:

    • Unanimous vote from all partners to dissolve

    • Withdrawal of all general partners with a majority of claims for dissolution

    • Failure to replace a vital partner within 90 days

    • Court-mandated dissolution due to impracticalities in operations.

    • Possible administrative dissolution due to non-compliance with state regulations.

  • General partners manage the winding-up process without rights for dissociated partners; limited partners can appoint a new general partner if necessary.

Distribution of Assets

  • Liquidation proceeds are distributed following the settlement of creditor claims, with remaining assets allocated per partners' distribution rights.

  • Partners risk contributing additional cash to satisfy creditor claims if the partnership's assets are insufficient. This does not apply in an LLLP, where liability is limited to capital contributions.