{"id":163,"date":"2014-09-17T00:42:04","date_gmt":"2014-09-17T00:42:04","guid":{"rendered":"https:\/\/courses.candelalearning.com\/buslegalenv\/?post_type=chapter&#038;p=163"},"modified":"2015-04-16T19:26:58","modified_gmt":"2015-04-16T19:26:58","slug":"20-1-limited-partnerships","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/chapter\/20-1-limited-partnerships\/","title":{"raw":"Limited Partnerships","rendered":"Limited Partnerships"},"content":{"raw":"<div class=\"bcc-box bcc-highlight\">\r\n<h3>Learning Objectives<\/h3>\r\nBy the end of this section, you will be able to:\r\n<ul id=\"mayer_1.0-ch52_s02_l01\" class=\"im_orderedlist\">\r\n\t<li>Governing law and definition<\/li>\r\n\t<li>Creation and capitalization<\/li>\r\n\t<li>Control and compensation<\/li>\r\n\t<li>Liabilities<\/li>\r\n\t<li>Taxation<\/li>\r\n\t<li>Termination<\/li>\r\n<\/ul>\r\n<\/div>\r\n\r\n<div id=\"mayer_1.0-ch42_s01_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Governing Law and Definition<\/h2>\r\nThe limited partnership is attractive because of its treatment of taxation and its imposition of limited liability on its limited partners.\r\n<div id=\"mayer_1.0-ch42_s01_s01_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Governing Law<\/h2>\r\nThe original source of limited partnership law is the Uniform Limited Partnership Act (ULPA), which was drafted in 1916. A revised version, the Revised Uniform Limited Partnership Act (RULPA), was adopted by the National Conference of Commissioners on Uniform Laws in 1976 and further amended in 1985 and in 2001.\r\n\r\nThe 2001 act was drafted for a world in which limited liability partnerships and limited liability companies can meet many of the needs formerly met by limited partnerships. This Act therefore targets two types of enterprises that seem largely beyond the scope of LLPs and LLCs: (i) sophisticated, manager-entrenched commercial deals whose participants commit for the long term, and (ii) estate planning arrangements (family limited partnerships). The Act accordingly assumes that, more often than not, people utilizing it will want (1) strong centralized management, strongly entrenched, and (2) passive investors with little control over or right to exit the entity. The Act\u2019s rules, and particularly its default rules, have been designed to reflect these assumptions.<span id=\"mayer_1.0-fn42_001\" class=\"im_footnote\">\u201cUniform Limited Partnership Act (2001), Prefatory Note,\u201d NCCUSL Archives, <a class=\"im_link\" href=\"http:\/\/www.law.upenn.edu\/bll\/archives\/ulc\/ulpa\/final2001.pdf\" target=\"_blank\">http:\/\/www.law.upenn.edu\/bll\/archives\/ulc\/ulpa\/final2001.pdf<\/a>.<\/span>\r\n\r\nAll states except Louisiana adopted the 1976 or 1985 act\u2014most opting for the 1985 version\u2014and sixteen states have adopted the 2001 version. The acts may be properly referred to with a hyphen: \u201cULPA-1985,\u201d or \u201cULPA-2001\u201d; the word <em class=\"im_emphasis\">revised<\/em> has been dropped. Here, we mainly discuss ULPA-1985. The Uniform Partnership Act (UPA) or the Revised Uniform Partnership Act (RUPA) also applies to limited partnerships except where it is inconsistent with the limited partnership statutes. The ULPA-2001 is not so much related to UPA or RUPA as previous versions were.\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch42_s01_s01_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Definition<\/h2>\r\nA <span class=\"im_margin_term\"><span class=\"im_glossterm\">limited partnership<\/span><\/span> (LP) is defined as \u201ca partnership formed by two or more persons under the laws of a State and having one or more general partners and one or more limited partners.\u201d<span id=\"mayer_1.0-fn42_002\" class=\"im_footnote\">ULPA, Section 102(11).<\/span> The form tends to be attractive in business situations that focus on a single or limited-term project, such as making a movie or developing real estate; it is also widely used by private equity firms.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch42_s01_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Creation and Capitalization<\/h2>\r\nUnlike a general partnership, a limited partnership is created in accordance with the state statute authorizing it. There are two categories of partners: limited and general. The limited partners capitalize the business and the general partners run it.\r\n<div id=\"mayer_1.0-ch42_s01_s02_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Creation<\/h3>\r\nThe act requires that the firm\u2019s promoters file a <span class=\"im_margin_term\"><span class=\"im_glossterm\">certificate of limited partnership<\/span><\/span> with the secretary of state; if they do not, or if the certificate is substantially defective, a general partnership is created. The certificate must be signed by all general partners. It must include the name of the limited partnership (which must include the words <em class=\"im_emphasis\">limited partnership<\/em> so the world knows there are owners of the firm who are not liable beyond their contribution) and the names and business addresses of the general partners. If there are any changes in the general partners, the certificate must be amended. The general partner may be, and often is, a corporation. Having a general partner be a corporation achieves the goal of limited liability for everyone, but it is somewhat of a \u201cclunky\u201d arrangement. That problem is obviated in the limited liability company, discussed in Section 20.2 \"Limited Liability Companies\". Here is an example of a limited partnership operating agreement: <a class=\"im_link\" href=\"http:\/\/www.wyopa.com\/Articles%20of%20limited%20partnership.htm\" target=\"_blank\">http:\/\/www.wyopa.com\/Articles%20of%20limited%20partnership.htm<\/a>.\r\n\r\nAny natural person, partnership, limited partnership (domestic or foreign), trust, estate, association, or corporation may become a partner of a limited partnership.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch42_s01_s02_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Capitalization<\/h3>\r\nThe money to capitalize the business typically comes mostly from the <span class=\"im_margin_term\"><span class=\"im_glossterm\">limited partners<\/span><\/span>, who may themselves be partnerships or corporations. That is, the limited partners use the business as an investment device: they hope the managers of the firm (the general partners) will take their contributions and give them a positive return on it. The contributions may be money, services, or property, or promises to make such contributions in the future.\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch42_s01_s03\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Control and Compensation<\/h2>\r\n<div id=\"mayer_1.0-ch42_s01_s03_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Control<\/h3>\r\nControl is <em class=\"im_emphasis\">not<\/em> generally shared by both classes of partners.\r\n<div id=\"mayer_1.0-ch42_s01_s03_s01_s01\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">General Partners<\/h4>\r\nThe control of the limited partnership is in the hands of the general partners, which may\u2014as noted\u2014be partnerships or corporations.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch42_s01_s03_s01_s02\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">Limited Partners<\/h4>\r\nUnder ULPA-1985 and its predecessors, a limited partner who exercised any significant control would incur liability like a general partner as to third parties who believed she was one (the \u201ccontrol rule\u201d). However, among the things a limited partner could do that would <em class=\"im_emphasis\">not<\/em> risk the loss of insulation from personal liability were these \u201csafe harbors\u201d:\r\n<ul id=\"mayer_1.0-ch42_s01_s03_s01_s02_l01\" class=\"im_itemizedlist im_editable im_block\">\r\n\t<li>Acting as an agent, employee, or contractor for the firm; or being an officer, director, or shareholder of a corporate general partner<\/li>\r\n\t<li>Consulting with the general partner of the firm<\/li>\r\n\t<li>Requesting or attending a meeting of partners<\/li>\r\n\t<li>Being a surety for the firm<\/li>\r\n\t<li>Voting on amendments to the agreement, on dissolution or winding up the partnership, on loans to the partnership, on a change in its nature of business, on removing or admitting a general or limited partner<\/li>\r\n<\/ul>\r\nHowever, see Section 20.3.3 \"Limited Liability Limited Partnerships\" for how this \u201ccontrol rule\u201d has been abolished under ULPA-2001.\r\n\r\nGeneral partners owe fiduciary duties to other general partners, the firm, and the limited partners; limited partners who do not exercise control do not owe fiduciary duties. See Figure 20.1 \"The Limited Partnership under ULPA-1985\".\r\n<div id=\"mayer_1.0-ch42_s01_s03_s01_s02_f01\" class=\"im_figure im_large im_editable im_block\">\r\n\r\n<span class=\"im_title-prefix\">Figure 20.1<\/span> The Limited Partnership under ULPA-1985\r\n\r\n<a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_23\/512b8efc2e5f1695eff74e386e00dd7b.jpg\" target=\"_blank\"><img src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/140\/2014\/09\/20045939\/sm_512b8efc2e5f1695eff74e386e00dd7b.jpg\" alt=\"\" \/><\/a>\r\n\r\n<\/div>\r\nThe partnership agreement may specify which general or limited partners have the right to vote on any matter, but if the agreement grants limited partners voting rights beyond the \u201csafe harbor,\u201d a court may abolish that partner\u2019s limited liability.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch42_s01_s03_s01_s03\" class=\"im_section\">\r\n<h5 class=\"im_title im_editable im_block\">Assignment of Partnership Rights<\/h5>\r\nLimited partnership interests may be assigned in whole or in part; if in whole, the assignor ceases to be a partner unless otherwise agreed. An assignment is usually made as security for a loan. The assignee becomes a new limited partner only if all the others consent or if provided for in the certificate; the assignment does not cause dissolution. The happy ease with which a limited partner can divest himself of the partnership interest makes the investment in the firm here more like that in a corporation than in a general partnership.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch42_s01_s03_s01_s04\" class=\"im_section\">\r\n<h5 class=\"im_title im_editable im_block\">Inspection of Books<\/h5>\r\nLimited partners have the right to inspect the firm\u2019s books and records, they may own competing interests, they may be creditors of the firm, and they may bring derivative suits on the firm\u2019s behalf. They may not withdraw their capital contribution if that would impair creditors\u2019 rights.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch42_s01_s03_s01_s05\" class=\"im_section\">\r\n<h5 class=\"im_title im_editable im_block\">Addition of New Partners<\/h5>\r\nUnless the partnership agreement provides otherwise (it usually does), the admission of additional limited partners requires the written consent of all. A general partner may withdraw at any time with written notice; if withdrawal is a violation of the agreement, the limited partnership has a right to claim of damages. A limited partner can withdraw any time after six months\u2019 notice to each general partner, and the withdrawing partner is entitled to any distribution as per the agreement or, if none, to the fair value of the interest based on the right to share in distributions.\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch42_s01_s03_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Compensation<\/h3>\r\nWe noted in discussing partnerships that the partners are not entitled to \u201ccompensation,\u201d that is, payment for their work; they are entitled to a share of the profits. For limited partnerships, the rule is a bit different.\r\n<div id=\"mayer_1.0-ch42_s01_s03_s02_s01\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">General Partners<\/h4>\r\nOften, general partners are paid for their management work on a sliding scale, receiving a greater share of each dollar of cash flow as the limited partners\u2019 cash distributions rise, thus giving the general partner an incentive to increase limited-partner distributions.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch42_s01_s03_s02_s02\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">Limited Partners<\/h4>\r\nProfits or losses are shared as agreed in the certificate or, if there is no agreement, in accordance with the percentages of capital contributions made.\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch42_s01_s04\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Liabilities<\/h2>\r\nLiability is not shared.\r\n<div id=\"mayer_1.0-ch42_s01_s04_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">General Partners<\/h3>\r\nThe general partners are liable as in a general partnership, and they have the same fiduciary duty and duty of care as partners in a general partnership. However, see the discussion in Section 20.3.3 \"Limited Liability Limited Partnerships\" of the newest type of LP, the limited liability limited partnership (triple LP), where the general partner is also afforded limited liability under ULPA-2001.\r\n<div id=\"mayer_1.0-ch42_s01_s04_s01_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Limited Partners<\/h3>\r\nThe limited partners are only liable up to the amount of their capital contribution, provided the surname of the limited partner does not appear in the partnership name (unless his name is coincidentally the same as that of one of the general partners whose name does appear) and provided the limited partner does not participate in control of the firm. See Section 20.4.1 \"Limited Partnerships: Limited Partners\u2019 Liability for Managing Limited Partnership\" for a case that highlights liability issues for partners.\r\n\r\nWe have been discussing ULPA-1985 here. But in a world of limited liability companies, limited liability partnerships, and limited liability limited partnerships, \u201cthe control rule has become an anachronism\u201d; ULPA-2001 \u201cprovides a full, status-based liability shield for each limited partner, \u2018even if the limited partner participates in the management and control of the limited partnership.\u2019<span id=\"mayer_1.0-fn42_003\" class=\"im_footnote\">ULPA-2001, Section 303.<\/span> The section thus eliminates the so-called control rule with respect to personal liability for entity obligations and brings limited partners into parity with LLC members, LLP partners and corporate shareholders.\u201d<span id=\"mayer_1.0-fn42_004\" class=\"im_footnote\">Official Comment to Uniform Limited Partnership Act 2001, Section 303.<\/span> And as will be noted in Section 20.3.3 \"Limited Liability Limited Partnerships\" under ULPA-2001 the <em class=\"im_emphasis\">general<\/em> partner is also shielded from liability.\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch42_s01_s05\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Taxation<\/h2>\r\nAssuming the limited partnership meets a minimum number of criteria related to limited liability, centralized management, duration, and transferability of ownership, it can enjoy the benefits of pass-through taxation; otherwise it will be taxed as a corporation. Pass-through (\u201cconduit\u201d) taxation is usually very important to partners.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch42_s01_s06\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Termination<\/h2>\r\nThe limited partnership\u2019s termination involves the same three steps as in a general partnership: (1) dissolution, (2) winding up, and (3) termination.\r\n<div id=\"mayer_1.0-ch42_s01_s06_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Dissolution<\/h2>\r\nDissolution of a limited partnership is the first step toward termination (but termination does not necessarily follow dissolution). The limited partners have no power to dissolve the firm except on court order, and the death or bankruptcy of a limited partner does not dissolve the firm. The following events may cause dissolution: (1) termination of the partnership as per the certificate\u2019s provisions; (2) termination upon an event specified in the partnership agreement; (3) the unanimous written consent of the partners; (4) the withdrawal of a general partner, unless at least one remains and the agreement says one is enough, or if within ninety days all partners agree to continue; (5) an event that causes the business to be illegal; and (6) judicial decree of dissolution when it is not reasonable to carry on. If the agreement has no term, its dissolution is not triggered by some agreed-to event, and none of the other things listed cause dissolution.\r\n\r\nDissolution requires the filing of a certificate of cancellation with the state if winding up commences.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch42_s01_s06_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Winding Up<\/h2>\r\nGeneral partners who have not wrongfully dissolved the partnership may wind it up, and so may the limited partners if all the general partners have wrongfully dissolved the firm. Any partner or that person\u2019s legal representative can petition a court for winding up, with cause.\r\n\r\nUpon winding up, the assets are distributed (1) to creditors, including creditor-partners, not including liabilities for distributions of profit; (2) to partners and ex-partners to pay off unpaid distributions; (3) to partners as return of capital contributions, unless otherwise agreed; and (4) to partners for partnership interests in proportion as they share in distributions, unless otherwise agreed. No distinction is made between general and limited partners\u2014they share equally, unless otherwise agreed. When winding up is completed, the firm is terminated.\r\n\r\nIt is worth reiterating the part about \u201cunless otherwise agreed\u201d: people who form any kind of a business organization\u2014partnership, a hybrid form, or corporations\u2014can to a large extent choose to structure their relationship as they see fit. Any aspect of the company\u2019s formation, operation, or ending that is not included in an agreement flops into the default provisions of the relevant law.\r\n<div id=\"mayer_1.0-ch42_s01_s06_s02_n01\" class=\"im_key_takeaways im_editable im_block textbox\">\r\n<h3 class=\"im_title\">Key Takeaway<\/h3>\r\nA limited partnership is a creature of statute: it requires filing a certificate with the state because it confers on some of its members the marvel of limited liability. It is an investment device composed of one or more general partners and one or more limited partners; limited partners may leave with six months\u2019 notice and are entitled to an appropriate payout. The general partner is liable as a partner is a general partnership; the limited partners\u2019 liability is limited to the loss of their investment, unless they exercise so much control of the firm as to become general partners. The general partner is paid, and the general and limited partners split profit as per the agreement or, if none, in the proportion as they made capital contributions. The firm is usually taxed like a general partnership: it is a conduit for the partners\u2019 income. The firm is dissolved upon the end of its term, upon an event specified in the agreement, or in several other circumstances, but it may have indefinite existence.\r\n\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\">\r\n<h3>Exercises<\/h3>\r\n<section id=\"self-check-questions\">\r\n<ol>\r\n\t<li>Why does the fact that the limited liability company provides limited liability for some of its members mean that a state certificate must be filed?<\/li>\r\n\t<li>What liability has the general partner? The limited partner?<\/li>\r\n\t<li>How easy is it for the limited partner to dispose of (sell) her partnership interest?<\/li>\r\n<\/ol>\r\n<\/section><\/div>\r\n<div id=\"mayer_1.0-ch52_s02_s06_n02\" class=\"im_exercises im_editable im_block\"><\/div>\r\n<\/div>","rendered":"<div class=\"bcc-box bcc-highlight\">\n<h3>Learning Objectives<\/h3>\n<p>By the end of this section, you will be able to:<\/p>\n<ul id=\"mayer_1.0-ch52_s02_l01\" class=\"im_orderedlist\">\n<li>Governing law and definition<\/li>\n<li>Creation and capitalization<\/li>\n<li>Control and compensation<\/li>\n<li>Liabilities<\/li>\n<li>Taxation<\/li>\n<li>Termination<\/li>\n<\/ul>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Governing Law and Definition<\/h2>\n<p>The limited partnership is attractive because of its treatment of taxation and its imposition of limited liability on its limited partners.<\/p>\n<div id=\"mayer_1.0-ch42_s01_s01_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Governing Law<\/h2>\n<p>The original source of limited partnership law is the Uniform Limited Partnership Act (ULPA), which was drafted in 1916. A revised version, the Revised Uniform Limited Partnership Act (RULPA), was adopted by the National Conference of Commissioners on Uniform Laws in 1976 and further amended in 1985 and in 2001.<\/p>\n<p>The 2001 act was drafted for a world in which limited liability partnerships and limited liability companies can meet many of the needs formerly met by limited partnerships. This Act therefore targets two types of enterprises that seem largely beyond the scope of LLPs and LLCs: (i) sophisticated, manager-entrenched commercial deals whose participants commit for the long term, and (ii) estate planning arrangements (family limited partnerships). The Act accordingly assumes that, more often than not, people utilizing it will want (1) strong centralized management, strongly entrenched, and (2) passive investors with little control over or right to exit the entity. The Act\u2019s rules, and particularly its default rules, have been designed to reflect these assumptions.<span id=\"mayer_1.0-fn42_001\" class=\"im_footnote\">\u201cUniform Limited Partnership Act (2001), Prefatory Note,\u201d NCCUSL Archives, <a class=\"im_link\" href=\"http:\/\/www.law.upenn.edu\/bll\/archives\/ulc\/ulpa\/final2001.pdf\" target=\"_blank\">http:\/\/www.law.upenn.edu\/bll\/archives\/ulc\/ulpa\/final2001.pdf<\/a>.<\/span><\/p>\n<p>All states except Louisiana adopted the 1976 or 1985 act\u2014most opting for the 1985 version\u2014and sixteen states have adopted the 2001 version. The acts may be properly referred to with a hyphen: \u201cULPA-1985,\u201d or \u201cULPA-2001\u201d; the word <em class=\"im_emphasis\">revised<\/em> has been dropped. Here, we mainly discuss ULPA-1985. The Uniform Partnership Act (UPA) or the Revised Uniform Partnership Act (RUPA) also applies to limited partnerships except where it is inconsistent with the limited partnership statutes. The ULPA-2001 is not so much related to UPA or RUPA as previous versions were.<\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s01_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Definition<\/h2>\n<p>A <span class=\"im_margin_term\"><span class=\"im_glossterm\">limited partnership<\/span><\/span> (LP) is defined as \u201ca partnership formed by two or more persons under the laws of a State and having one or more general partners and one or more limited partners.\u201d<span id=\"mayer_1.0-fn42_002\" class=\"im_footnote\">ULPA, Section 102(11).<\/span> The form tends to be attractive in business situations that focus on a single or limited-term project, such as making a movie or developing real estate; it is also widely used by private equity firms.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Creation and Capitalization<\/h2>\n<p>Unlike a general partnership, a limited partnership is created in accordance with the state statute authorizing it. There are two categories of partners: limited and general. The limited partners capitalize the business and the general partners run it.<\/p>\n<div id=\"mayer_1.0-ch42_s01_s02_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Creation<\/h3>\n<p>The act requires that the firm\u2019s promoters file a <span class=\"im_margin_term\"><span class=\"im_glossterm\">certificate of limited partnership<\/span><\/span> with the secretary of state; if they do not, or if the certificate is substantially defective, a general partnership is created. The certificate must be signed by all general partners. It must include the name of the limited partnership (which must include the words <em class=\"im_emphasis\">limited partnership<\/em> so the world knows there are owners of the firm who are not liable beyond their contribution) and the names and business addresses of the general partners. If there are any changes in the general partners, the certificate must be amended. The general partner may be, and often is, a corporation. Having a general partner be a corporation achieves the goal of limited liability for everyone, but it is somewhat of a \u201cclunky\u201d arrangement. That problem is obviated in the limited liability company, discussed in Section 20.2 &#8220;Limited Liability Companies&#8221;. Here is an example of a limited partnership operating agreement: <a class=\"im_link\" href=\"http:\/\/www.wyopa.com\/Articles%20of%20limited%20partnership.htm\" target=\"_blank\">http:\/\/www.wyopa.com\/Articles%20of%20limited%20partnership.htm<\/a>.<\/p>\n<p>Any natural person, partnership, limited partnership (domestic or foreign), trust, estate, association, or corporation may become a partner of a limited partnership.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s02_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Capitalization<\/h3>\n<p>The money to capitalize the business typically comes mostly from the <span class=\"im_margin_term\"><span class=\"im_glossterm\">limited partners<\/span><\/span>, who may themselves be partnerships or corporations. That is, the limited partners use the business as an investment device: they hope the managers of the firm (the general partners) will take their contributions and give them a positive return on it. The contributions may be money, services, or property, or promises to make such contributions in the future.<\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s03\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Control and Compensation<\/h2>\n<div id=\"mayer_1.0-ch42_s01_s03_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Control<\/h3>\n<p>Control is <em class=\"im_emphasis\">not<\/em> generally shared by both classes of partners.<\/p>\n<div id=\"mayer_1.0-ch42_s01_s03_s01_s01\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">General Partners<\/h4>\n<p>The control of the limited partnership is in the hands of the general partners, which may\u2014as noted\u2014be partnerships or corporations.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s03_s01_s02\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">Limited Partners<\/h4>\n<p>Under ULPA-1985 and its predecessors, a limited partner who exercised any significant control would incur liability like a general partner as to third parties who believed she was one (the \u201ccontrol rule\u201d). However, among the things a limited partner could do that would <em class=\"im_emphasis\">not<\/em> risk the loss of insulation from personal liability were these \u201csafe harbors\u201d:<\/p>\n<ul id=\"mayer_1.0-ch42_s01_s03_s01_s02_l01\" class=\"im_itemizedlist im_editable im_block\">\n<li>Acting as an agent, employee, or contractor for the firm; or being an officer, director, or shareholder of a corporate general partner<\/li>\n<li>Consulting with the general partner of the firm<\/li>\n<li>Requesting or attending a meeting of partners<\/li>\n<li>Being a surety for the firm<\/li>\n<li>Voting on amendments to the agreement, on dissolution or winding up the partnership, on loans to the partnership, on a change in its nature of business, on removing or admitting a general or limited partner<\/li>\n<\/ul>\n<p>However, see Section 20.3.3 &#8220;Limited Liability Limited Partnerships&#8221; for how this \u201ccontrol rule\u201d has been abolished under ULPA-2001.<\/p>\n<p>General partners owe fiduciary duties to other general partners, the firm, and the limited partners; limited partners who do not exercise control do not owe fiduciary duties. See Figure 20.1 &#8220;The Limited Partnership under ULPA-1985&#8221;.<\/p>\n<div id=\"mayer_1.0-ch42_s01_s03_s01_s02_f01\" class=\"im_figure im_large im_editable im_block\">\n<p><span class=\"im_title-prefix\">Figure 20.1<\/span> The Limited Partnership under ULPA-1985<\/p>\n<p><a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_23\/512b8efc2e5f1695eff74e386e00dd7b.jpg\" target=\"_blank\"><img decoding=\"async\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/140\/2014\/09\/20045939\/sm_512b8efc2e5f1695eff74e386e00dd7b.jpg\" alt=\"\" \/><\/a><\/p>\n<\/div>\n<p>The partnership agreement may specify which general or limited partners have the right to vote on any matter, but if the agreement grants limited partners voting rights beyond the \u201csafe harbor,\u201d a court may abolish that partner\u2019s limited liability.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s03_s01_s03\" class=\"im_section\">\n<h5 class=\"im_title im_editable im_block\">Assignment of Partnership Rights<\/h5>\n<p>Limited partnership interests may be assigned in whole or in part; if in whole, the assignor ceases to be a partner unless otherwise agreed. An assignment is usually made as security for a loan. The assignee becomes a new limited partner only if all the others consent or if provided for in the certificate; the assignment does not cause dissolution. The happy ease with which a limited partner can divest himself of the partnership interest makes the investment in the firm here more like that in a corporation than in a general partnership.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s03_s01_s04\" class=\"im_section\">\n<h5 class=\"im_title im_editable im_block\">Inspection of Books<\/h5>\n<p>Limited partners have the right to inspect the firm\u2019s books and records, they may own competing interests, they may be creditors of the firm, and they may bring derivative suits on the firm\u2019s behalf. They may not withdraw their capital contribution if that would impair creditors\u2019 rights.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s03_s01_s05\" class=\"im_section\">\n<h5 class=\"im_title im_editable im_block\">Addition of New Partners<\/h5>\n<p>Unless the partnership agreement provides otherwise (it usually does), the admission of additional limited partners requires the written consent of all. A general partner may withdraw at any time with written notice; if withdrawal is a violation of the agreement, the limited partnership has a right to claim of damages. A limited partner can withdraw any time after six months\u2019 notice to each general partner, and the withdrawing partner is entitled to any distribution as per the agreement or, if none, to the fair value of the interest based on the right to share in distributions.<\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s03_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Compensation<\/h3>\n<p>We noted in discussing partnerships that the partners are not entitled to \u201ccompensation,\u201d that is, payment for their work; they are entitled to a share of the profits. For limited partnerships, the rule is a bit different.<\/p>\n<div id=\"mayer_1.0-ch42_s01_s03_s02_s01\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">General Partners<\/h4>\n<p>Often, general partners are paid for their management work on a sliding scale, receiving a greater share of each dollar of cash flow as the limited partners\u2019 cash distributions rise, thus giving the general partner an incentive to increase limited-partner distributions.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s03_s02_s02\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">Limited Partners<\/h4>\n<p>Profits or losses are shared as agreed in the certificate or, if there is no agreement, in accordance with the percentages of capital contributions made.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s04\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Liabilities<\/h2>\n<p>Liability is not shared.<\/p>\n<div id=\"mayer_1.0-ch42_s01_s04_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">General Partners<\/h3>\n<p>The general partners are liable as in a general partnership, and they have the same fiduciary duty and duty of care as partners in a general partnership. However, see the discussion in Section 20.3.3 &#8220;Limited Liability Limited Partnerships&#8221; of the newest type of LP, the limited liability limited partnership (triple LP), where the general partner is also afforded limited liability under ULPA-2001.<\/p>\n<div id=\"mayer_1.0-ch42_s01_s04_s01_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Limited Partners<\/h3>\n<p>The limited partners are only liable up to the amount of their capital contribution, provided the surname of the limited partner does not appear in the partnership name (unless his name is coincidentally the same as that of one of the general partners whose name does appear) and provided the limited partner does not participate in control of the firm. See Section 20.4.1 &#8220;Limited Partnerships: Limited Partners\u2019 Liability for Managing Limited Partnership&#8221; for a case that highlights liability issues for partners.<\/p>\n<p>We have been discussing ULPA-1985 here. But in a world of limited liability companies, limited liability partnerships, and limited liability limited partnerships, \u201cthe control rule has become an anachronism\u201d; ULPA-2001 \u201cprovides a full, status-based liability shield for each limited partner, \u2018even if the limited partner participates in the management and control of the limited partnership.\u2019<span id=\"mayer_1.0-fn42_003\" class=\"im_footnote\">ULPA-2001, Section 303.<\/span> The section thus eliminates the so-called control rule with respect to personal liability for entity obligations and brings limited partners into parity with LLC members, LLP partners and corporate shareholders.\u201d<span id=\"mayer_1.0-fn42_004\" class=\"im_footnote\">Official Comment to Uniform Limited Partnership Act 2001, Section 303.<\/span> And as will be noted in Section 20.3.3 &#8220;Limited Liability Limited Partnerships&#8221; under ULPA-2001 the <em class=\"im_emphasis\">general<\/em> partner is also shielded from liability.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s05\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Taxation<\/h2>\n<p>Assuming the limited partnership meets a minimum number of criteria related to limited liability, centralized management, duration, and transferability of ownership, it can enjoy the benefits of pass-through taxation; otherwise it will be taxed as a corporation. Pass-through (\u201cconduit\u201d) taxation is usually very important to partners.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s06\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Termination<\/h2>\n<p>The limited partnership\u2019s termination involves the same three steps as in a general partnership: (1) dissolution, (2) winding up, and (3) termination.<\/p>\n<div id=\"mayer_1.0-ch42_s01_s06_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Dissolution<\/h2>\n<p>Dissolution of a limited partnership is the first step toward termination (but termination does not necessarily follow dissolution). The limited partners have no power to dissolve the firm except on court order, and the death or bankruptcy of a limited partner does not dissolve the firm. The following events may cause dissolution: (1) termination of the partnership as per the certificate\u2019s provisions; (2) termination upon an event specified in the partnership agreement; (3) the unanimous written consent of the partners; (4) the withdrawal of a general partner, unless at least one remains and the agreement says one is enough, or if within ninety days all partners agree to continue; (5) an event that causes the business to be illegal; and (6) judicial decree of dissolution when it is not reasonable to carry on. If the agreement has no term, its dissolution is not triggered by some agreed-to event, and none of the other things listed cause dissolution.<\/p>\n<p>Dissolution requires the filing of a certificate of cancellation with the state if winding up commences.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch42_s01_s06_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Winding Up<\/h2>\n<p>General partners who have not wrongfully dissolved the partnership may wind it up, and so may the limited partners if all the general partners have wrongfully dissolved the firm. Any partner or that person\u2019s legal representative can petition a court for winding up, with cause.<\/p>\n<p>Upon winding up, the assets are distributed (1) to creditors, including creditor-partners, not including liabilities for distributions of profit; (2) to partners and ex-partners to pay off unpaid distributions; (3) to partners as return of capital contributions, unless otherwise agreed; and (4) to partners for partnership interests in proportion as they share in distributions, unless otherwise agreed. No distinction is made between general and limited partners\u2014they share equally, unless otherwise agreed. When winding up is completed, the firm is terminated.<\/p>\n<p>It is worth reiterating the part about \u201cunless otherwise agreed\u201d: people who form any kind of a business organization\u2014partnership, a hybrid form, or corporations\u2014can to a large extent choose to structure their relationship as they see fit. Any aspect of the company\u2019s formation, operation, or ending that is not included in an agreement flops into the default provisions of the relevant law.<\/p>\n<div id=\"mayer_1.0-ch42_s01_s06_s02_n01\" class=\"im_key_takeaways im_editable im_block textbox\">\n<h3 class=\"im_title\">Key Takeaway<\/h3>\n<p>A limited partnership is a creature of statute: it requires filing a certificate with the state because it confers on some of its members the marvel of limited liability. It is an investment device composed of one or more general partners and one or more limited partners; limited partners may leave with six months\u2019 notice and are entitled to an appropriate payout. The general partner is liable as a partner is a general partnership; the limited partners\u2019 liability is limited to the loss of their investment, unless they exercise so much control of the firm as to become general partners. The general partner is paid, and the general and limited partners split profit as per the agreement or, if none, in the proportion as they made capital contributions. The firm is usually taxed like a general partnership: it is a conduit for the partners\u2019 income. The firm is dissolved upon the end of its term, upon an event specified in the agreement, or in several other circumstances, but it may have indefinite existence.<\/p>\n<\/div>\n<div class=\"bcc-box bcc-info\">\n<h3>Exercises<\/h3>\n<section id=\"self-check-questions\">\n<ol>\n<li>Why does the fact that the limited liability company provides limited liability for some of its members mean that a state certificate must be filed?<\/li>\n<li>What liability has the general partner? The limited partner?<\/li>\n<li>How easy is it for the limited partner to dispose of (sell) her partnership interest?<\/li>\n<\/ol>\n<\/section>\n<\/div>\n<div id=\"mayer_1.0-ch52_s02_s06_n02\" class=\"im_exercises im_editable im_block\"><\/div>\n<\/div>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-163\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Business and the Legal Environment. <strong>Authored by<\/strong>: Anonymous. <strong>Provided by<\/strong>: Anonymous. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/\">http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nc-sa\/4.0\/\">CC BY-NC-SA: Attribution-NonCommercial-ShareAlike<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":5,"menu_order":131,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"Business and the Legal Environment\",\"author\":\"Anonymous\",\"organization\":\"Anonymous\",\"url\":\"http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/\",\"project\":\"\",\"license\":\"cc-by-nc-sa\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-163","chapter","type-chapter","status-publish","hentry"],"part":764,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/163","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/users\/5"}],"version-history":[{"count":5,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/163\/revisions"}],"predecessor-version":[{"id":1003,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/163\/revisions\/1003"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/parts\/764"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/163\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/media?parent=163"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapter-type?post=163"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/contributor?post=163"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/license?post=163"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}