Limited Partnerships, Limited Liability Partnerships, and Limited Liability Companies

Limited Partnerships (LPs)

  • Definition: A distinct legal entity with one or more general partners and one or more limited partners.

  • Governed by state law with mainly "default rules."

  • "Partner" refers to both general and limited partners.

  • Use: Generally used as a financing vehicle to raise cash for business projects, commonly in real estate development and the film industry.

Sources of Limited Partnership Law

  • State Statute

  • Partnership Agreement

State Statute

  • Revised Uniform Limited Partnership Act (RULPA 1985): Adopted in most states (including Delaware and Florida).

  • If RULPA (1985) is silent, courts will consider applicable general partnership law.

  • General partnership law applies to general partners.

Partnership Agreement

  • Primary source of limited partnership law.

  • Rationale: Businesspeople should structure relationships as they see fit.

  • Gap-Filling: If not in the partnership agreement, the matter is resolved according to RULPA's default provisions.

  • Underlying Policy: To give maximum effect to freedom of contract and the enforceability of limited partnership agreements.

  • Partners have discretion in drafting agreements, and the partnership agreement constitutes the entire agreement among the partners.

Formation

  • Requires:

    • Certificate of Limited Partnership

    • Records Office

    • Agent for Service of Process

    • Partnership Agreement

Certificate of Limited Partnership

  • Document signed by each general partner, setting forth:

    • Name of partnership

    • Name and address of agent for service of process

    • Name and address of each general partner

    • Whether the partnership is a limited liability partnership
      *Why required? Limited partnership statutes condition existence on public filing, unlike general partnerships.

Records Office

  • Limited partnership must maintain an office with records of:

    • Certificate of limited partnership

    • Partnership agreement

    • Partnership’s tax return for the 3 most current years

  • The registered office can be changed by filing a statement of change.

Agent for Service of Process

  • Limited partnership must maintain an agent for service of process.

  • The agent can be changed by filing a statement.

Partnership Agreement

  • Every limited partnership must have a writing that sets out:

    • Amount of cash or agreed value of property or services contributed by each partner

    • Times at which future contributions are to be made

    • Specification of transferable interest each person owns (if a person is both a general and limited partner)

    • Any events of dissolution

Name of Partnership

  • Partnership name must contain “limited partnership” or “limited,” or abbreviations “L.P.,” “Ltd.,” or “LP.”
    *This requirement exists for transparency and notice to third parties.

Dual Capacity

  • A person can be both a general partner and a limited partner.

  • Such a person has rights, powers, duties, and obligations in each capacity.

  • Example: A person can vote in both capacities.

Annual Report

  • Between January 1 and May 1 each year, a limited partnership must renew its certificate of authority by filing a report and paying a fee.

Cash Flow Rights

  • Conflicting Policy Objectives:

    • Partnership Law: Pick-Your-Partner Rule (owners cannot be forced into business with a stranger without consent).

    • UCC: Alienability (facilitate voluntary transfers of personal property).

    • Policy Resolution: Bifurcate ownership into cash flow rights and control rights.

  • Transferability requires separation of ownership & control, and no personal liability.

  • Limited partnership interest is more likely to be transferable if the limited partner exerts less control.

    • Limited Partners (Ownership) vs. General Partners (Control)

    • Shareholders (Ownership) vs. Managers (Control)

Transfer of Partnership Interest

  • Generally governed by the limited partnership agreement.

  • If the agreement is silent, default rules of the limited partnership statute apply.

Default Rules

  • Transfer of a partner’s transferable interest is permissible.

  • Transfer does not cause partner’s dissociation.

  • Pick-Your-Partner Rule: Transfer does not entitle the transferee to participate in management.

  • Transferee has the right to receive distributions the transferor-partner would have received.

Rights, Duties & Obligations

  • Rights:

    • Transferee has the right to receive distributions.

    • Transferee is not personally liable for partnership losses or obligations.

  • Duties:

    • Transferor retains rights other than the interest in distributions transferred.

    • Transferor retains all duties and obligations of a partner.

Distributions

  • Unless otherwise provided in partnership agreement, distributions are made on the basis of partners’ contributions (i.e., in proportion to the value of each partner’s contributions).

  • Differs from the general rule under RUPA, which provides that profit and losses are to be shared equally.

Charging Order

  • Upon application by a judgment creditor of a partner, a court can enter a charging order against the transferable interest of the judgment debtor for the unsatisfied amount of the judgment.

  • The charging order constitutes a lien on the judgment debtor’s transferable interest and requires the partnership to pay the judgment creditor any distribution that would otherwise be paid to the judgment debtor.

Asset Partitioning

  • If a limited partnership does not make distributions, then the judgment creditor receives nothing.

  • All undistributed assets and accrued cash flow remain inside the limited partnership.

Control Rights

  • Pick-Your-Partner Rule:

    • Unless the partnership agreement provides otherwise, no partner can transfer control rights without the consent of all other partners.

    • The transferee is not automatically entitled to exercise any rights or powers of a partner.

Control Rights of General Partners

  • Unless specified otherwise, a general partner has all the same control rights as a partner in a regular general partnership.

  • Unless otherwise provided, if more than 1 general partner, each has equal control rights.

Management Rights of General Partners

  • Each general partner has equal rights in the management and conduct of the limited partnership’s activities.

  • Any matter may be exclusively decided by the general partner (or a majority of general partners if more than 1).

Unanimous Approval

  • Required for:

    • Amendment of partnership agreement or certificate of limited partnership

    • Admitting a limited or general partner

    • Compromising a partner’s obligation to make contributions

    • Expelling a general or limited partner

    • Redeeming a transferable interest subject to a charging order

    • Dissolving the limited partnership

Information Rights of General Partners

  • A general partner’s right to information is like that of a partner in a general partnership.

Indemnification Rights of General Partners

  • A limited partnership must indemnify a general partner for liabilities incurred in the ordinary course of activities of the partnership.

Control Rights of Limited Partners

  • Limited partners may participate in management and control.

  • Participation does not cause a limited partner to become personally liable.

  • There are limits to this right. Too much control can result in personal liability.

Right to Information

  • Each limited partner has the right to:

    • Inspect and copy partnership records

    • Obtain full information regarding the state of the business and financial condition.

  • The limited partnership may impose reasonable restrictions on the use of the information.

Master Limited Partnerships (MLPs)

  • Publicly traded limited partnership.

  • Investors can buy units in an MLP on the public securities market (e.g., NYSE, NASDAQ).

  • Those who buy into an MLP are limited partners; the Pick-Your-Partner default rule is not applied.

Liability

General Partner’s Liability

  • Mandatory Rule: A general partner is personally jointly and severally liable for all obligations of the limited partnership.

  • Liability of Incoming General Partner: Not personally liable for preexisting obligations.

Limited Partner’s Liability

  • General Rule: Not personally liable for the obligation of the limited partnership solely by reason of being a limited partner.

  • Rationale: Limited partners have no or limited control over the business.

Control Rule Exception

  • Common Law: A limited partner who exerted “control” over the business can become liable.

  • Rationale: The limited partner has become a general partner by exercising control.

  • The common law control rule is overridden by RULPA.

RULPA Statutory Rule

  • A limited partner is not liable unless:

    • The limited partner is also a general partner, OR

    • The limited partner participates in the control of the business, AND

    • The person suing reasonably believed the limited partner was a general partner based on the conduct of the limited partner.

Statutory Safe Harbors

  • A limited partner does not participate in the control of the business if:

    • Officer, director, or stockholder of a corporate general partner

    • Consults with or advises a general partner

    • Acts as a surety

    • Requests or attends meeting of general partners

    • Votes on transactions related to:

      • Disposition of partnership assets

      • Change in partnership indebtedness

      • Change in the nature of the business

      • Amendment to the partnership agreement

      • Admission/removal of new general or limited partner

Fiduciary Duties

Duties of Limited Partner

  • General Rule: A limited partner has no fiduciary duty solely by reason of being a limited partner.

  • Exception: To the extent a limited partner has management duties, they owe duties of loyalty and care with respect to those duties.

Duties of General Partner

  • A general partner owes the same fiduciary duties to the limited partnership and other partners as a general partner owes to a general partnership and other partners.

Statutory Construction of Partnership Agreement

  • The statute gives maximum effect to the principle of freedom of contract.

  • A partner’s fiduciary duties may be expanded, restricted, or eliminated by the partnership agreement EXCEPT for the duty of good faith and fair dealing.

Dissociation

Dissociation of GP

  • General Rule: Same events cause dissociation of a general partner in a limited partnership as in a general partnership.

Effect of Dissociation of GP

  • Rights: No further rights as a general partner.

  • Fiduciary Duties: Terminate.

  • Obligations: Dissociation does not discharge obligations incurred while a general partner.

  • Dissolution: A general partner’s withdrawal threatens but does not necessarily cause dissolution.

LP’s Power to Dissociate

  • Whether a limited partner has the power to dissociate depends on whether the partnership agreement:

    • States a specific term for the partnership, AND

    • Authorizes limited partner withdrawal.

  • In certain cases, a limited partner has neither the power nor the right to withdraw.

Dissociation as LP: Case 1

  • If the limited partnership agreement provides for limited partner withdrawal, then the limited partner can withdraw only as provided in the partnership agreement.

Dissociation as Limited Partner: Case 2

  • If the limited partnership agreement:

    • Does not provide for limited partner withdrawal, AND

    • Does not provide for a specific term for the partnership,

  • Then the limited partner can withdraw on 6 months’ written notice.

  • This situation is unlikely to occur because RULPA requires the certificate of limited partnership to state a definite term.

Dissociation as Limited Partner: Case 3

  • If the limited partnership agreement:

    • Does not provide for limited partner withdrawal, AND

    • Provides for a specific term for the partnership,

  • Then the limited partner cannot withdraw.

  • In this case, the limited partner has neither the power nor the right to withdraw.

Effect of Dissociation by LP

  • Rights: No further rights as a limited partner.

  • Obligations: Dissociation does not discharge any obligation incurred while a limited partner.

  • Dissolution: Withdrawal of a limited partner cannot cause dissolution (provided withdrawal does not result in 0 limited partners).

  • Buyout: Unless the partnership agreement provides otherwise, a limited partner who withdraws has a right to a buyout.

Dissolution

Types of Dissolution

  • Judicial

  • Non-Judicial

Judicial Dissolution

  • A limited partnership can be judicially dissolved upon application by a partner if it is not reasonably practicable to carry on the limited partnership in conformity with the partnership agreement.

  • A limited partnership can also be administratively dissolved by the Department of State for failure to pay fees, file records, or deliver an annual report.

Non-Judicial Dissolution

  • Unless judicially dissolved, a limited partnership is dissolved only upon the occurrence of any of the following:

    • Happening of an event specified in the partnership agreement

    • Consent of all general and limited partners

    • After dissociation of a general partner, if there is at least 1 remaining general partner, consent to dissolve of ALL partners.

    • After dissociation of a general partner, if there are no remaining general partners, passage of 90 days after dissociation UNLESS before the end of the 90-day period all remaining partners consent to continue activities of the limited partnership and to admit at least one general partner (and do).

    • Passage of 90 days after dissociation of last limited partner UNLESS before the end of the 90-day period the limited partnership admits at least one limited partner.

Effects of Dissolution

  • If a general partner’s withdrawal results in dissolution, then the consequences are the same as dissolution of a general partnership (i.e., winding up & termination).

  • If the partnership avoids dissolution, then the former general partner has a right to a buyout (unless otherwise provided in the partnership agreement).

  • Wrongful Dissociation: If the withdrawal breached the partnership agreement, then the buyout is subject to any damages caused by the breach (or delay).

Winding Up

  • A limited partnership continues after dissolution only for purposes of winding up its activities.

  • In winding up, the partnership:

    • May preserve the business as a going concern for a reasonable time, prosecute and defend actions, transfer property, settle disputes, and perform other necessary acts;

    • Must address liabilities, settle and close partnership activities, and distribute assets, and

    • May file a statement of termination.

Distribution of Assets: Order of Priority

  • Assets are distributed first to creditors (including partners who are ordinary creditors of the partnership).

  • Any surplus is then paid in cash as distributions.

  • If the limited partnership’s assets are insufficient, then those who were general partners at the time the obligation was incurred must contribute to satisfy the obligation.

Limited Liability Partnerships (LLPs)

  • RUPA allows the creation of limited liability partnerships.

  • Partners are not personally liable for the limited liability partnership’s obligations.

  • Designed for professionals who normally do business as partners (e.g., lawyers, doctors, and accountants).

Formation

  • Name: Must end with “Registered Limited Liability Partnership” or “Limited Liability Partnership” or abbreviations “R.L.L.P.”, “RLLP,” “L.L.P.” or “LLP.”

  • Filing: The partnership must file a statement of qualification.

Liability of Partners

  • A partner of a limited liability partnership is not personally liable for the obligations of the partnership (whether arising in contract, tort, or otherwise).

  • A partner remains personally liable for:

    • Their own wrongful acts, OR

    • The wrongful acts of someone under their direct supervision.

Limited Liability Limited Partnerships (LLLPs)

  • A limited partnership may become a limited liability limited partnership by obtaining the necessary approval, filing a statement of qualification, and complying with name requirements.

  • Limitations on liability apply to both general and limited partners.

Limited Liability Companies (LLCs)

  • Offer its owners both:

    • Liability: Protection from liability for the business’s debts (like the liability protection of shareholders of a corporation), AND

    • Pass-Through Taxation: Same pass-through income tax characteristics as a partnership.

Terminology

  • Owners of an LLC are referred to as members.

Sources of LLC Law

  • State Statute

  • Operating Agreement

State Statute

  • Each state has a statute authorizing the creation of LLCs.

  • LLC statutes vary greatly from state to state.

  • In Florida, LLCs are governed by the Florida Revised Limited Liability Company Act (RLLC).

Operating Agreement

  • Courts must look to the terms of an Owners’ Agreement to determine the rules applicable to the operation of an LLC.

  • Only where the Operating Agreement is ambiguous, contrary to law, or does not contain a provision for a specific matter does LLC statutory provisions control.

Formation

  • Articles of Organization: One or more organizers files Articles of Organization with the state.

  • Articles of Organization must include:

    • Name

    • Mailing Address of Principal Office

    • Registered Agent and Registered Office

    • Continuity of Life: LLC has perpetual existence.

Management: Types of LLCs

  • Member-Managed LLC: Members manage the business.

  • Manager-Managed: Managers manage the business.

Member-Managed LLC

  • The decision-making authority of members is much like that of partners in a general partnership.

Manager-Managed LLC

The decision-making authority of managers is much like a corporation with a board of directors: professional managers and separation of ownership and management.

  • A manager can also be a member.

  • A manager is selected or removed by consent of the majority-in-interest of members.

Voting

  • Member-Managed LLC: All members are entitled to vote, and each vote is weighed in proportion to the member’s current percentage in profit of the LLC.

  • Manager-Managed LLC: Each manager has equal rights in the management and conduct of the LLC’s activities.

Powers

  • An LLC has most of the statutory powers accorded to a corporation, including:

    • Capacity to sue or be sued as an entity

    • To hold property

    • To adopt an operating agreement to govern its internal affairs.

Fiduciary Duties

  • Each manager of a manager-managed LLC and each member of a member-managed LLC owes fiduciary duties of care and loyalty to the LLC and other members.

Agency Authority

  • If management is vested in the membership, then individual members have apparent authority to bind the company contractually.

  • If management is vested in elected managers, then only such managers normally have such authority.

LLC’s Liability

  • Vicarious Liability: An LLC is a business entity and is vicariously liable for the actions and inactions of its managers or its members.

Member’s Liability

  • Limited Liability: Members and managers are generally not personally liable for company debts.

  • Creditors must look exclusively to the assets of the company to satisfy claims.

Finance

  • Profits and losses are shared among partners based on the agreed value of the capital contribution.

  • An LLC can make distributions to members, but no distribution can be made if the LLC would be insolvent after the distribution.

  • A member is entitled to the return of their capital contribution on dissolution.

Transferability of Interest

  • Cash Flow Rights: A member can freely transfer interest in profits and losses.

  • Control Rights: A member cannot transfer interest in managing the company without the unanimous consent of other members (unless otherwise provided in the operating agreement).

Dissociation

  • A person has the power to dissociate as a member of an LLC at any time (although a wrongfully dissociating member might be liable for damages).

  • Causes: Events that will cause dissociation of a partner in a general or limited partnership will also cause dissociation of a member of an LLC.

Dissolution

  • An LLC is dissolved:

    • Upon the occurrence of an event specified in the operating agreement,

    • Upon the unanimous consent of all members,

    • Upon passage of 90 days (if there are no members left),

    • When a court orders dissolution, OR

    • When the Department of State files a statement of administrative dissolution.