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

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Limited Partnerships Statutory creations Have both general and limited partners Used for investing in real estate, movie productions, oil and gas

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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a uniform set of provisions for the formation, operation, and dissolution of limited partnerships –Most states originally enacted this law

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Limited Partnership (continued) Liability limited to capital contribution No personal liability for partnership’s debts and obligations Personal liability for partnership’s debts and obligations Capital investment Debt or obligation owed Limited Partnership Third Party Limited Partner General Partner

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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, or 2.The business was carried on under that name before the admission of the limited partner.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Summary: Liability of Limited Partners General RuleLimited 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 Formation 2. Participation in Management 3. Personal Guarantee

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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