Limited Partnership Text Size:

A small business can be a limited partnership. A limited partnership has certain characteristics, including the limited liability of the limited partner. The partnership must be formed according to state law, and after formation, it is governed by a limited partnership agreement. Both general and limited partners have certain rights, powers and liabilities.

Definition

A limited partnership is a partnership formed by two or more persons under state laws having at least one general partner and one limited partner.

General partners manage and control the business of the limited partnership and are personally liable for all partnership obligations. Limited partners, on the other hand, contribute capital into the partnership and share in partnership profits, but do not take part in the control of the partnership business. In return, their liability for partnership obligations is limited to the extent of their capital contributions. The result is an entity which has the benefits of both limited liability for a majority of its members and the tax benefits associated with a partnership.

Major Characteristics

The primary purpose of the limited partnership entity is to enable one or more persons to invest capital into a partnership without incurring the unlimited liability of a general partner. A limited partnership has the following characteristics:

• Continuity of existence. The continuity of a limited partnership's existence is usually governed by the provisions of the limited partnership certificate and the terms of the limited partnership agreement.
• Capital requirements. The liabilities of limited partners are limited to the extent of their capital contributions. Limited partners may contribute cash, property, services rendered, or promissory notes or other obligations to contribute cash or property or to perform services in return for their status as limited partners.
• Members. Any natural person, partnership, limited partnership (domestic or foreign), trust, estate, association, or corporation may become a partner of a limited partnership.
• Extent of ownership liability for business debts. A limited partner can invest in a limited partnership with a limitation on his liability. General partners remain liable without limit for any obligations contracted by the partnership in the conduct of its business.
• Extent of ownership participation in management. A limited partner must not exercise control of the business if he is to avoid liability as a general partner.
• Transferability of partnership interests. A limited partner can assign his interest in the partnership without the consent of the other partners and without triggering the dissolution of the firm unless otherwise restricted in the partnership agreement.
• Organization and disclosure. In order to form a limited partnership, a certificate must be filed with the secretary of state of the applicable state of formation. The certificate must contain:
  • The name of the limited partnership
  • The address of the office and the name and address of the agent for service of process
  • The name and the business address of each general partner
  • The latest date upon which the limited partnership is to dissolve
  • Any other matters the general partners determine to include
  
  The partnership agreement does not have to be filed.
• Tax Factors. While corporations are taxed for profits at the corporate level and a second time at the shareholder level, limited partnerships are taxed only once at the partner level.

Formation of a Limited Partnership

In order for a limited partnership to be validly created, there must be substantial compliance with the limited partnership law of the state of formation. Invalid creation results in a general partnership with unlimited liability for all partners.

The limited partnership is governed by the limited partnership agreement. Most agreements contain provisions with respect to:

• Assignment of partnership interests
• Death of a limited partner
• Death or other disability of a general partner
• Compensation of a limited partner
• Withdrawal or reduction of a limited partner's contribution
• Loans and other business transactions between the firm and a limited partner
• Distribution of assets upon the dissolution and/or insolvency of the partnership

What Business May Be Transacted

A limited partnership may carry on any business that a partnership without limited partners may carry on, with exceptions (if any) that are designated by each state. For example, some states prohibit banking and insurance activities.

Where Business May Be Transacted

The authority of a limited partnership to conduct business in a state other than its state of formation is determined by the provisions of the state of formation's limited partnership law governing foreign limited partnerships.

General Partner's Rights, Powers and Liabilities

As a rule, a general partner has all the rights and powers and is subject to the restrictions of a partner in a partnership without limited partners.

General partners:

• Have fiduciary duties. They have sole control of the business of the partnership, and are the only ones who can act on its behalf. As such, they are accountable to the limited partners.
• Can vote on any matter, as provided in the partnership agreement
• May withdraw from the partnership at any time by giving written notice to the other partners. However, if the withdrawal violates the partnership agreement, the limited partnership may recover damages from the withdrawing partner for breach of the partnership agreement.

Limited Partner's Rights, Powers and Liabilities

The partners of a limited partnership may include in their partnership agreement any provision regarding the rights of the limited partners, given that such provisions do not violate the law.

A limited partner has the right to:

• Inspect partnership records and obtain information about the partnership from the general partners
• Receive his share of profits and losses and his share of distributions
• Lend money to and transact other business with the partnership
• Withdraw from the partnership upon not less than six months prior written notice to each general partner or as provided by the partnership agreement

Upon a limited partner's withdrawal from the partnership, he is entitled to receive any distributions due to him and the fair value of his interest in the limited partnership. He remains liable to the partnership for liabilities to creditors who extended credit before the return of his capital contribution.

If you have any questions about limited partnerships, contact a small business attorney in your area.

Questions for Your Attorney

• If an error was made in the certificate of limited partnership that was filed with the secretary of state, will an amendment to the certificate make the limited partnership valid?
• If a limited partnership was not validly created, who is responsible for the debts of the partnership and to what extent are they liable?
• If I am a limited partner in a limited partnership, can I terminate the employment of someone who works for the partnership? Can I force the general partner to do so?

Related Resources on Lawyers.com^sm