Copyright © 2004 by Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany BUSINESS LAW E-Commerce and Digital Law International Law and Ethics 5 th Edition by Henry R. Cheeseman Slides developed by Les Wiletzky Wiletzky and Associates, Puyallup, WA Chapter 33 Limited Partnerships and Limited Liability Partnerships Chapter 33 Limited Partnerships and Limited Liability Partnerships

33 - 2Copyright © 2004 by Prentice-Hall. All rights reserved. Entrepreneurial Forms of Conducting Business Sole Proprietorship General Partnership Limited Partnership Limited Liability Partnership Limited Liability Company Corporation

33 - 3Copyright © 2004 by Prentice-Hall. All rights reserved. Limited Partnership A type of partnership that has two types of partners: A type of partnership that has two types of partners: General Partners – who invest capital, manage the business, and are personally liable for partnership debts. General Partners – who invest capital, manage the business, and are personally liable for partnership debts. Limited Partners – who invest capital but do not participate in management and are not personally liable for partnership debts beyond their capital contribution. Limited Partners – who invest capital but do not participate in management and are not personally liable for partnership debts beyond their capital contribution.

33 - 4Copyright © 2004 by Prentice-Hall. All rights reserved. Limited Partnership (continued) Liability limited to capital contribution No personal liability for partnerships debts and obligations Personal liability for partnerships debts and obligations Capital investment Debt or obligation owed Limited Partnership Third Party Limited Partner General Partner

33 - 5Copyright © 2004 by Prentice-Hall. All rights reserved. Limited Partnership (continued) A limited partnership must have at least one general partner and one limited partner. 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 in a limited partnership. There are no restrictions on the number of general or limited partners allowed in a limited partnership. Any person may be a general or limited partner. Any person may be a general or limited partner.

33 - 6Copyright © 2004 by Prentice-Hall. All rights reserved. The Revised Uniform Limited Partnership Act (RULPA) 1 of 2 Uniform Limited Partnership Act (ULPA) Uniform Limited Partnership Act (ULPA) Promulgated in 1916 Promulgated in 1916 Contained a uniform set of provisions for the formation, operation, and dissolution of limited partnerships Contained a uniform set of provisions for the formation, operation, and dissolution of limited partnerships Most states originally enacted this law Most states originally enacted this law

33 - 7Copyright © 2004 by Prentice-Hall. All rights reserved. The Revised Uniform Limited Partnership Act (RULPA) 2 of 2 Revised Uniform Limited Partnership Act (RULPA) Revised Uniform Limited Partnership Act (RULPA) A 1976 revision of the ULPA A 1976 revision of the ULPA Provides a more modern comprehensive law for the formation, operation, and dissolution of limited partnerships Provides a more modern comprehensive law for the formation, operation, and dissolution of limited partnerships A majority of states have adopted the RULPA A majority of states have adopted the RULPA

33 - 8Copyright © 2004 by Prentice-Hall. All rights reserved. A Corporation as the Sole General Partner The RULPA permits a corporation to be the sole general partner of a limited partnership. The RULPA permits a corporation to be the sole general partner of a limited partnership. Shareholders of corporations are liable only up to their capital contributions. Shareholders of corporations are liable only up to their capital contributions.

33 - 9Copyright © 2004 by Prentice-Hall. All rights reserved. Formation of Limited Partnerships The creation of limited partnerships is formal and requires public disclosure. The creation of limited partnerships is formal and requires public disclosure. The entity must comply with the statutory requirements of the RULPA or other state statute. The entity must comply with the statutory requirements of the RULPA or other state statute. Certificate of Limited Partnership – a document that two or more persons must execute and sign that makes the limited partnership legal and binding. Certificate of Limited Partnership – a document that two or more persons must execute and sign that makes the limited partnership legal and binding.

Copyright © 2004 by Prentice-Hall. All rights reserved. Formation of Limited Partnerships (continued) Certificate of Amendment – a document that keeps the certificate of limited partnership current. Certificate of Amendment – a document that keeps the certificate of limited partnership current. Limited Partnership Agreement – a document that sets forth: Limited Partnership Agreement – a document that sets forth: The rights and duties of the general and limited partners; and The rights and duties of the general and limited partners; and The terms and conditions regarding the operation, dissolution, and termination of the limited partnership. The terms and conditions regarding the operation, dissolution, and termination of the limited partnership.

Copyright © 2004 by Prentice-Hall. All rights reserved. Formation of Limited Partnerships (continued) 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.

Copyright © 2004 by Prentice-Hall. All rights reserved. Formation of Limited Partnerships (continued) Domestic Limited Partnership – A limited partnership in the state in which it is formed. 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 Limited Partnership – A limited partnership in all other states than the one in which it was formed.

Copyright © 2004 by Prentice-Hall. All rights reserved. Formation of Limited Partnerships (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. 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. Certificate of Registration – A document permitting a foreign limited partnership to transact business in a foreign state.

Copyright © 2004 by Prentice-Hall. All rights reserved. Federal Income Tax Liability of a Limited Partnership Limited partnerships are created according to statutory requirements. Limited partnerships are created according to statutory requirements. They are not separate taxpaying entities for federal income tax purposes. They are not separate taxpaying entities for federal income tax purposes. The income and losses from the limited partnership are reported on the personal income tax returns of the partners. The income and losses from the limited partnership are reported on the personal income tax returns of the partners. A limited partnership must file an informa- tional return with the IRS. A limited partnership must file an informa- tional return with the IRS.

Copyright © 2004 by Prentice-Hall. All rights reserved. Liability of General and Limited Partners General partners of a limited partnership have unlimited liability for debts and obligations of the partnership. General partners of a limited partnership have unlimited liability for debts and obligations of the partnership. Limited partners are liable only up to their capital contributions. Limited partners are liable only up to their capital contributions. As a trade-off for limited liability, limited partners give up their right to participate in the control and management of the limited partnership. As a trade-off for limited liability, limited partners give up their right to participate in the control and management of the limited partnership.

Copyright © 2004 by Prentice-Hall. All rights reserved. Permissible Activities of Limited Partners Being an: Being an: Agent of the limited partnership Agent of the limited partnership Employee of the limited partnership Employee of the limited partnership Contractor of the limited partnership Contractor of the limited partnership General partner General partner Being a consultant or advisor to a general partner regarding the limited partnership. Being a consultant or advisor to a general partner regarding the limited partnership.

Copyright © 2004 by Prentice-Hall. All rights reserved. Permissible Activities of Limited Partners (continued) Acting as a surety for the limited partnership. Acting as a surety for the limited partnership. Approving or disapproving an amendment to the limited partnership agreement. Approving or disapproving an amendment to the limited partnership agreement. Voting on certain specific partnership matters. Voting on certain specific partnership matters.

Copyright © 2004 by Prentice-Hall. All rights reserved. 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 Formation 2. Participation in Management 3. Personal Guarantee

Copyright © 2004 by Prentice-Hall. All rights reserved. Partners Rights in a Limited Partnership The rights, powers, duties, and responsibilities of the partners in a limited partnership are specified in the: The rights, powers, duties, and responsibilities of the partners in a limited partnership are specified in the: Articles of limited partnership or the certificate of limited partnership Articles of limited partnership or the certificate of limited partnership States limited partnership statute States limited partnership statute Common law Common law

Copyright © 2004 by Prentice-Hall. All rights reserved. Partners Rights in a Limited Partnership (continued) The general partners of a limited partnership have the same rights, duties, and powers as partners in a general partnership. The general partners of a limited partnership have the same rights, duties, and powers as partners in a general partnership. Other rights of partners: Other rights of partners: Share of profits and losses Share of profits and losses Right to information Right to information Voting rights Voting rights Admission of new partners Admission of new partners Withdrawal of partners Withdrawal of partners

Copyright © 2004 by Prentice-Hall. All rights reserved. Dissolution of a Limited Partnership Under the RULPA, the following four events cause the dissolution of a limited partnership: 1.The end of the life of the limited partnership as specified in the certificate of limited partnership 2.The written consent of all general and limited partners 3.The withdrawal of a general partner 4.The entry of a decree of judicial dissolution

Copyright © 2004 by Prentice-Hall. All rights reserved. Decree of Judicial Dissolution A decree of dissolution that is granted to a partner whenever it is not reasonably practical to carry on the business in conformity with the limited partnership agreement. A decree of dissolution that is granted to a partner whenever it is not reasonably practical to carry on the business in conformity with the limited partnership agreement.

Copyright © 2004 by Prentice-Hall. All rights reserved. Winding-Up a Limited Partnership A limited partnership must wind up its affairs upon dissolution. A limited partnership must wind up its affairs upon dissolution. Upon the dissolution and the commencement of winding up a limited partnership, a 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. Upon the dissolution and the commencement of winding up a limited partnership, a 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.

Copyright © 2004 by Prentice-Hall. All rights reserved. Distribution of Assets After the assets of the limited partnership have been liquidated, the proceeds must be distributed. 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: The RULPA provides the following order of distribution of partnership assets: Creditors of the limited partnership Creditors of the limited partnership Partners with respect to Partners with respect to Unpaid distributions Unpaid distributions Capital contributions Capital contributions The remainder of the proceeds The remainder of the proceeds

Copyright © 2004 by Prentice-Hall. All rights reserved. Limited Liability Partnership (LLP) A special form of partnership where all partners are limited partners and there are no general partners. A special form of partnership where all partners are limited partners and there are no general partners. None of the partners is personally liable for the debts and obligations of the partnership beyond his or her capital contribution. None of the partners is personally liable for the debts and obligations of the partnership beyond his or her capital contribution.

Copyright © 2004 by Prentice-Hall. All rights reserved. Limited Liability Partnership (LLP) (continued) Liability limited to capital contribution No personal liability for partnerships debts and obligations Capital investment Debt or obligation owed Limited Liability Partnership (LLP) Third Party Limited Partner

Copyright © 2004 by Prentice-Hall. All rights reserved. Limited Liability Partnership (LLP) (continued) The LLP is taxed as a partnership. The LLP is taxed as a partnership. Each partners share of the income or loss from the partnership is reported on his or her individual income tax return. Each partners share of the income or loss from the partnership is reported on his or her individual income tax return. The LLP is required to file an informational income tax return with the IRS. The LLP is required to file an informational income tax return with the IRS.

Copyright © 2004 by Prentice-Hall. All rights reserved. Limited Liability Partnership (LLP) (continued) LLPs are mainly used by professionals such as accountants and lawyers. LLPs are mainly used by professionals such as accountants and lawyers. Many state laws require LLPs to carry a minimum of $1 million of liability insurance that covers negligence, wrongful acts, and misconduct by partners or employees of the LLP. Many state laws require LLPs to carry a minimum of $1 million of liability insurance that covers negligence, wrongful acts, and misconduct by partners or employees of the LLP. This requirement guarantees that injured third parties will have compensation to recover for their injuries. This requirement guarantees that injured third parties will have compensation to recover for their injuries.

Copyright © 2004 by Prentice-Hall. All rights reserved. LLP: Articles of Partnership Must be filed with the secretary of state of the state in which the LLP is organized. Must be filed with the secretary of state of the state in which the LLP is organized. The LLP is a domestic LLP in the state in which it is organized. The LLP is a domestic LLP in the state in which it is organized. The LLP must register as a foreign LLP in any other state in which it wants to conduct business. The LLP must register as a foreign LLP in any other state in which it wants to conduct business.