What is a limited partnership?
it is a PS formed by two or more persons having one or more general partners and one or more limited partners.
What is the difference between general partners and limited partners?
A general partner manages the business and is personally liable without limitation for PS obligations.
A limited partner contributes capital and shares in profits, but generally takes no part in the control or management of the business. His liability is limited to his contributions.
How is an LP formed?
A LP is formed by paying the required filing fee and filing with the secretary of state a certificate of LP, which must state:
- the name of the LP;
- the addresses of the designated office and the name and address of the initial agent for service of process;
- the name and address of each general partner;
- whether the LP is a LLLP;
- the term of its duration, if the duration is not to be perpetual; and
- any additional information required by law.
The certificate must be signed by all general partners listed in the certificate.
Only the general partners have a duty to amend the certificate and have potential liability for false statements on which a third party relies.
The name of the PS must contain the appropriate abbreviation.
A LP has a perpetual duration unless the certificate provides otherwise.
How does an LP do business?
A LP may carry on any business that a GP is allowed to carry on.
A LP must continuously maintain an office and a resident agent for the service of process in the state where it is organized.
Except as provided in the PS agreement, a partner may lend money to and transact other business with the LP and ha the same rights as a general creditor in the case of an unsecured loan.
A LP must maintain at its designated office the following information:
- a current list of names and addresses of each partner, separately identifying general and limited partners;
- a copy of the certificate of limited PS and any amendments;
- a copy of any filed articles of conversion or merger;
- a copy of tax returns for the three most recent years;
- a copy of the PS agreement and any amendments;
- a copy of any financial statement fro the three most recent years;
- a copy of the three most recent annual certificates;
- a copy of any record of any consent given or vote taken; and
- unless contained in a PS agreement made in a record, a record stating:
a. the amount of case and a description of value of other benefits contributed and agreed to be contributed by each partner.
b. the times at which any additional contributions are to be made by each partner;
c. for nay person that is both a general partner and a limited partner, a specification of what transferable interest the person owns in each capacity; and
d. any event upon the happening of which the LP is to be dissolved and its activities wound up.
What can the general and limited partners contribute to an LP?
A general or limited partner may contribute tangible or intangible property.
A partner’s obligation to perform any promise to contribute is not excused by the partner’s death, disability, or other inability to perform personally.
If the partner fails to contribute property or services, he must pay the cash value of property or services at the option of the PS, unless the PS certificate provides otherwise. the obligation to make a contribution may be compromised only by consent of all partners. However, a creditor of a LP that extends credit or otherwise acts in reliance on an obligation by a partner to make a contribution, without notice of any compromise by all partners, may enforce the original obligation.
What allocations are allowed in a LP?
The profits and losses of a LP are allocated, and all distributions of cash or other assets are made, among the partners or classes of partners:
- in accordance with the PS agreement; or
- absent such provision, on the basis of the amount of each partner’s contribution, to the extent they have been received by the LP.
What are the liabilities and limitations of limited partners?
The name of the LP may contain the name of any partner.
A limited partner is not personally liable for PS obligations.
A limited partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for an obligation of the LP solely by reason of being a limited partner, even if the limited partner participates in the management and control of the business. If found to be liable, a limited partner is only liable up to the amount of his contribution.
A person who makes a contribution to a business enterprise and erroneously, but in good faith, believes that he has become a limited partner is not liable as a general partner if, on learning his mistake, he:
- causes an amended certificate of PS or certificate of amendment to be executed and filed; or
- withdraws from future equity participation in the enterprise.
A limited partner is liable as a general partner, however, to any third party who transacts business with the PS before the limited partner withdraws or files an amended certificate if the third party actually believed in good faith that such person was a general partner at the time of the transaction.
What are the rights and powers of limited partners?
Right to information
Upon 10 days’ demand, a limited partner may inspect and copy required information during regular business hours. The limited partner need not have any particular purpose for seeking the information.
A limited partner may obtain and copy true and full information regarding the status of the business and the financial condition of the LP as is just and reasonable if:
- the limited partner seeks the information for a purpose reasonably related to the partner’s interest as a limited partner;
- the limited partner makes a demand describing with particularity the information sought and the purpose for seeking the information; and
- the information sought is directly connected to the limited partner’s purpose.
The LP may impose reasonable restrictions on the use of the information.
Duties
A limited partner does not have any fiduciary duty to the LP or to any other partner.
A limited partner must discharge his duties and exercise any rights consistently with the obligation of good faith and fair dealing.
When does a person become a limited partner?
A person becomes a limited partner:
- as provided in the PS agreement;
- as the result of a conversion or merger; or
- with the consent of all the partners.
When does a person become a general partner?
A person becomes a general partner:
- as provided in the PS agreement;
- following the dissociation of the LP’s last general partner;
- the result of a conversion or merger; or
- with the consent of all the partners.
A person may be both a general and limited partner. His rights and liabilities will be to the extent of his participation in the LP.
When is a PS interest transferable?
A PS interest is personal property and is generally transferable, unless otherwise provided in the PS agreement.
A transfer does not dissolve a LP, but a transferee is entitled only to receive the distributions to which his transferor would have been entitled.
A transferee who becomes a partner has all the rights and power of the transferor. A transferee is liable for the transferor’s obligations, unless they were unknown to him at the time the transferee became a partner.
A legal representative of a deceased or incompetent partner may exercise all of the partner’s rights, including the power to make a transferee a limited partner.
A judgment creditor of a partner can obtain a charging order against a partner’s interest, and to that extent will be a transferee of the interest.
What rules govern distributions?
Distributions of assets are allocated among the partners on the basis of the value of each partner’s contributions.
A partner does not have a right to any distribution before the dissolution and winding up of the LP unless the LP decides to make an interim distribution.
A partner has no right to receive a distribution upon dissociation.
Regardless of the nature of his contribution, a partner has no right to receive his distribution in any form other than cash.
A partner entitled to a distribution has the status of and is entitled to all remedies available a creditor. However, the LP’s obligation is offset for any amount owed the LP by the partner.
A partner may not receive a distribution if, after the distribution:
- the LP would not be able to pay its debts as they become due in the ordinary course of the LP’s activities; or
- the LP’s total assets would be less than the sum of its total liabilities plus the amount needed if the LP were dissolved, wound up, and terminated at the time of the distribution, to satisfy the preferential rights upon dissolution, winding up, and termination of partners whose rights are superior to hose of persons receiving the distribution.
A partner may not receive a distribution from a LP to the extent that after giving effect to the distribution, the liabilities of LP exceed the fair value of the PS assets.
What rules govern a limited partner’s dissociation?
A limited partner does not have the right to dissociate as a limited partner before the cessation of the LP.
Upon a person’s dissociation as a limited partner:
- the person does not have further rights as a limited partner;
- the person’s obligation of good faith and fair dealing continues only as to matters arising and events occurring before dissociation; and
- any transferable interest owned by the person in his capacity as a limited partner immediately before dissociation is owned by the person as a mere transferee.
A person’s dissociation as a limited partner does not of itself discharge the person from any obligation to the LP or the other partners which the person incurred while a limited partner.
What rules govern a general partner’s dissociation?
A general partner has the power to dissociate at any time, rightfully or wrongfully.
A general partner’s dissociation is wrongful only if:
- it is in violation of the PS agreement;
- it occurs before the cessation of the LP, and:
a. the person withdraws as a general partner by express will;
b. the person is expelled as a general partner by judicial determination;
c. the person is dissociated by becoming a debtor in bankruptcy; or
d. in the case of a person that is not an individual, trust other than a business trust, or estate, the person is expelled or otherwise dissociated as a general partner because it willfully dissolved or terminated.
A person that wrongfully dissociates as a general partner is liable to the LP and the other partners for damages caused by the dissociation.
A person that has dissociated as a general partner, but whose dissociation did not result in dissolution and winding up of the LP’s activities, is liable on a transaction entered into by the LP after the dissociation only if:
- a general partner would be liable on the transaction; and
- at the time the other party enters into the transaction:
a. less than two years has passed since the dissociation; and
b. the other party does not have notice of the dissociation and reasonably believes that the person is a general partner.
When is an LP dissolved?
A LP is dissolved and its affairs wound up:
- at the time or upon the happening of the events specified in the PS agreement;
- upon the written consent of all partners;
- upon the dissociation of a general partner unless:
a. there is at least one remaining general partner, in which case, the LP is not dissolved and will not be wound up and the business will be continued by the remaining general partners; or
b. within 90 days after the withdrawal, all remaining partners agree in writing to continue the business of the LP and to the appointment of one or more additional general partners, in which case the LP is not dissolved and not required to be wound up; or - 90 days after the dissociation of the LP’s last limited partner, unless before the end of that period the LP admits at least one limited partner.
On application by or for a partner, the court may decree the dissolution of a LP whenever it is not reasonably practicable to carry on the business in conformity with the PS agreement.
What happens after dissolution?
Upon dissolution, the general partners who have not wrongfully dissolved the LP, or if none, the limited partners, may wind up PS affairs.
In winding up, the LP:
- may amend its certificate of LP to state that it is dissolved, preserve the LP business or property as a going concern for a reasonable time, prosecute and defend actions and proceedings, transfer the LP’s property, settle disputes by mediation or arbitration, file a statement of termination, and perform other necessary acts; and
- must discharge the LP’s liabilities, settle and close the LP’s activities, and marshal and distribute the LP’s assets.
The court may wind up the LP’s affairs upon application of any partner.
How are distributions made and what is the priority of liabilities upon dissolution?
After winding up, assets are distributed as follows:
- to creditors, including partners who are creditors, in satisfaction of obligations of the LP; and
- any surplus remaining must be paid in cash as a distribution.
If the LP’s assets are insufficientto satisfy all of its obligations upon winding up, each person, who was a general partner when the obligation was incurred and was not otherwise released form the obligation, must contribute to the LP in proportion to his right to receive distributions.
If a person does not contribute the amount required, the other general partners required to make a payment must contribute the additional amount needed in proportion to their right to receive distributions at the time the obligation was incurred.
