19 - 133 - 1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 35 Limited Partnerships

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 133 - 1

Chapter 35Limited Partnerships


Limited Partnerships• Statutory creations• Have both general and

limited partners• Used for investing in real

estate, movie productions, oil and gas


Limited Partnership• A type of partnership that has

two types of partners:– General Partners –invest

capital, manage the business, and are personally liable for partnership debts.

– Limited Partners –invest capital, but do not participate in management and are not personally liable for partnership debts beyond their capital contribution.


Limited Partnership (continued)

• A limited partnership must have at least one general partner and one limited partner.

• There are no restrictions on the number of general or limited partners allowed.

• Any person may be a general or limited partner.

• Corporation may be sole general partner.– Shareholders are liable only up to

their capital contributions.


The Revised Uniform Limited Partnership Act (RULPA)

• Uniform Limited Partnership Act (ULPA)– Promulgated in 1916– Contained a uniform set of

provisions for the formation, operation, and dissolution of limited partnerships

– Most states originally enacted this law


The Revised Uniform Limited Partnership Act (RULPA)

(continued)

• Revised Uniform Limited Partnership Act (RULPA) – A 1976 revision of the ULPA– Provides a more modern

comprehensive law for the formation, operation, and dissolution of limited partnerships

– A majority of states have adopted the RULPA


Limited Partnership (continued)

Liability limited to capital Liability limited to capital contributioncontribution

No personal liability for partnership’s No personal liability for partnership’s debts and obligationsdebts and obligations

Personal liability for partnership’s Personal liability for partnership’s debts and obligationsdebts and obligations

Capital investmentCapital investment

Debt or obligation Debt or obligation owedowedLimited Limited

PartnershipPartnershipThird PartyThird Party

Limited Limited PartnerPartner

Limited Limited PartnerPartner

General General PartnerPartner

General General PartnerPartner


Formation of Limited Partnerships

• The creation of limited partnerships is formal

• Requires public disclosure.• Entity must comply with the

statutory requirements of the RULPA or other state statute.


Certificate of Limited Partnership• Document that two or more

persons must execute and sign.• Contains name of limited

partnership, purpose, names and addresses of partners, agent, and principal place of business, contributions of each partner.

• Must be filed with secretary of state.

• Not formed until certificate filed.


Amendments to Certificate of Limited Partnership

• Certificate must be kept current by filing amendments

• Filed at same offices as certificate

• Changes must be filed within 30 days– Change in capital contributions– Admission of new partner– Withdrawal of partner– Continuation of business after

judicial dissolution or withdrawal of general partner


Name of Limited Partnership

• The firm name of a limited partnership may not include the surname of a limited partner unless:1.it is also the surname of a

general partner, or2.The business was carried on

under that name before the admission of the limited partner.


Name of Limited Partnership (continued)

• Other restrictions:1. The name cannot be the same as or

deceptively similar to the names of other businesses or partnerships.

2. States can designate the words that cannot be used in limited partnership names

3. The name must contain without abbreviation the words limited partnership


Capital Contributions• Under RULPA, these may be

in cash, property, services rendered, or a promissory note or other obligations to contribute cash, property, or to perform services.

• Partners or creditors may bring lawsuit to enforce promise to make contribution.


Defective Formation• Occurs when:

1. A certificate of limited partnership is not properly filed,

2. There are defects in a certificate that is filed, or

3. Some other statutory requirement for the creation of a limited partnership is not met.

• Limited partners who have been erroneously been listed as a general partner can have certificate of amendment filed or can withdraw• Liable as a general partner for all

transactions until amendment filed.


Limited Partnership Agreement

• Document that sets forth:– The rights and duties of the

general and limited partners; and

– The terms and conditions regarding the operation

– dissolution and termination terms.

• If no agreement, certificate serves as articles.


Share of Profits and Losses(continued)

• The limited partnership agreement may specify how profits and losses are to be allocated among the general and limited partners.

• If there is no such agreement, RULPA provides that profits and losses from a limited partnership are shared on the basis of the value of the partner’s capital contribution

• A limited partner is not liable for losses beyond his or her capital contribution


Right to Information• Upon reasonable demand true and full

information regarding the state of the business, the financial condition, etc. The limited partnership must also keep the following records at its principal office:– Copy of certificate of limited liability and

all amendments thereto– List of the full names and business

addresses of each partner– Copies of effective written limited

partnership agreements– Copies of federal, state, and local

income tax returns– Copies of financial statements for the

three most recent years.


Admission of New Partners• A new limited partner can be

added only upon the written consent of all partners.– Agreement can provide otherwise.\

• Admission effective after amendment filed.


Foreign or Domestic?

• Domestic Limited Partnership – A limited partnership in the state in which it is formed.

• Foreign Limited Partnership – A limited partnership in all other states than the one in which it was formed.


Foreign or Domestic? (continued)

• Under the RULPA, the law of the state in which the entity is organized governs its organization, its internal affairs, and the liability of its limited partners.

• Certificate of Registration – A document permitting a foreign limited partnership to transact business in a foreign state.


Liability of General and Limited Partners

• General partners of a limited partnership have unlimited liability for debts and obligations of the partnership.

• Limited partners are liable only up to amount of their capital contributions.– Give up right to

participate in the control and management


Participation in Management• General partners have

management rights.• Limited partners give up

these right in exchange for limited liability.– Liable as general partner if

participation is substantially the same.

– Only liable to persons who reasonably believe them to be general partners.


Permissible Activities of Limited Partners

• Being an:– Agent of the limited

partnership– Employee of the limited

partnership– Contractor of the limited

partnership– General partner

• Being a consultant or advisor to a general partner regarding the limited partnership.


Permissible Activities of Limited Partners (continued)

• Acting as a surety for the limited partnership.

• Approving or disapproving an amendment to the limited partnership agreement.

• Voting on certain specific partnership matters.


Liability on Personal Guarantee

• When an extension of credit from a bank, supplier, or other creditor is not approved based on the credit of the limited partnership, the creditor my require a limited partner to guarantee the repayment of the loan in order to secure repayment.

• Creditor may enforce personal guarantee if limited partnership defaults.


Summary: Liability of Limited Partners

General Rule Limited partners are not individually liable for the obligations or conduct of the partnership beyond the amount of their capital contribution.

Exceptions to the General Rule

Limited partners are individually liable for the debt, obligations, and tortious acts of the partnership in three situations:1. Defective Formation2. Participation in Management3. Personal Guarantee


Dissolution of a Limited Partnership

• Partnership may be dissolved:

– At the end of the life of the limited partnership as specified in the certificate of limited partnership.

– With the written consent of all general and limited partners.

– Because of the withdrawal of a general partner.

– With the entry of a decree of judicial dissolution.


Winding-Up a Limited Partnership

• A limited partnership must wind up its affairs upon dissolution.

• Certificate of cancellation must be filed by the limited partnership with the secretary of state of the state in which the limited partnership is organized.


Distribution of Assets• After the assets of the limited

partnership have been liquidated, the proceeds must be distributed.

• The RULPA provides the following order of distribution of partnership assets:– Creditors of the limited

partnership– Partners with respect to

• Unpaid distributions• Capital contributions• The remainder of the

proceeds

Documents

19 - 133 - 1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 35 Limited Partnerships