Limited and Family Limited Partnerships

Distinguishing Attributes of Limited Partnerships and Family Limited Partnerships

• Definition of Limited Partnerships:

  • Exists by state statute recognizing multiple partners (general and limited).

  • At least one general partner (managing principal) and at least one limited partner (investing principal).

  • Governed by the Revised Uniform Limited Partnership Act (RULPA) unless overridden by a specific partnership agreement.

• Key Legal Framework:

  • RULPA works with the Revised Uniform Partnership Act (RUPA) for issues of liability or operation.

  • Written agreements take precedence; absent, RULPA addresses issues.

• Formation of Limited Partnerships:

  • General partner files a certificate of limited partnership with the state (e.g., secretary of state).

  • Certificate typically includes:

    • Name of the partnership

    • General nature of the business

    • Addresses of the partnership and its resident agent

    • List of partners and their contributions

• Though not required, partnerships typically have a formal agreement detailing partner relations.

• Personal Liability of Partners:

  • General Partners:

    • Personally liable for debts and liabilities of the partnership.

  • Limited Partners:

    • Liability limited to their investment in the partnership (e.g., Macduff in Redfern Catering, LP).

    • Exceptions exist for illegal or negligent actions taken in the scope of their duties.

• Capitalization of Limited Partnerships:

  • Funded through debt (borrowing) or equity (selling ownership interests).

  • Cannot sell publicly (e.g., on NYSE) but can sell to investors under strict securities laws.

• Taxation of Partners:

  • Pass-through entities like general partnerships; losses/profits reported on personal tax returns.

  • General partner files an information return; limited partnerships do not pay corporate taxes.

• Management and Operations:

  • General Partners:

    • Manage daily operations and can bind the partnership legally.

  • Limited Partners:

    • Must not engage in daily management to retain liability limits.

    • Allowed to consult or provide expertise but risk losing limited status if they participate in management.

    • Have rights to financial records and, if in agreement, may have expanded management roles but not to the extent of daily operations.

• Profit and Loss Distribution:

  • Partners share profits and losses proportional to their contributions, not necessarily equally.

  • E.g., if contributions change during a partnership, loss distribution adjusts accordingly.

• Family Limited Partnerships:

  • A subtype of limited partnership focusing on estate planning for wealthy families.

  • Used to transfer assets to heirs under favorable IRS conditions, facilitating estate and gift tax management.

  • Allows families to lower market value for gifts, thus minimizing taxes and protecting family wealth across generations.

Key Takeaways

• General vs. Limited Partners:

  • General partners manage the business and are fully liable; limited partners are primarily investors with limited liability.

• Establishment of Partnerships:

  • Formation requires filing and generally an agreement to outline roles and responsibilities.

• Legal and Tax Implications:

  • Limited partnerships emphasize liability limitation and complex tax advantages in wealth transfer, especially in family contexts.