Limited Partnerships: - Cengage



Partnerships

Association of two or more persons or entities

who operate a business for profit

Forms of Partnerships

General Partnerships

Limited Partnerships

Limited Partnerships

Limited Liability Partnerships

Limited Liability Limited Partnerships

Limited Partnership Associations

Limited Partnerships

Limited Partnership

General partners manage and have personal liability.

Limited partners invest without personal liability.

Limited Liability Partnership

a partnership without liability for negligence or malfeasance of other partners

General partners manage and are liable for partnership contracts and own negligence.

Limited Liability Limited Partnership

a hybrid: limited liability partnership and limited partnership

General partners manage without vicarious liability for negligence or malfeasance of other partners.

Limited partners manage and invest without vicarious liability for negligence or malfeasance of other partners.

(Both are liable only for partnership contracts and own negligence or malfeasance.)

Limited Partnership Association

Limited partnership associations have indefinite duration.

Members and managers have no personal liability.

Limited Partnerships

Managers and investors working together

An association of two or more persons

carrying on business as co-owners for profit

with

one or more general partners (managers)

and

one or more limited partners (investors)

General Partners

1. manage partnerships

2. are personally liable for partnership obligations

Limited Partners

= Investors

1. no management or participation rights

2. no personal liability for partnership debts

(Liability is limited to investment in partnership.)

Key: If a limited partner participates in management of partnership, he or she loses liability protections.

□ Formation of Limited Partnership

✓ Register an assumed business name.

✓ File a notice of partnership association, if required by state law.

✓ Obtain the required business and professional licenses and permits.

✓ Draft a comprehensive partnership agreement.

✓ Review taxation filings.

✓ Apply for sales tax permit, if goods will be sold.

✓ Apply for a tax identification number with the Internal Revenue Service (IRS), the state, or both.

✓ Establish employee withholdings as well as unemployment and workers’ compensation coverage.

Plus, limited partnerships must

✓ Include designation “Limited Partnership” in partnership name.

✓ File a certificate of limited partnership with secretary of state.

✓ Address limited partnership in partnership agreement.

✓ File an application for foreign limited partnership if transacting business in a foreign jurisdiction.

➢ Name

Requirements

1. Name must include designation “Limited Partnership”.

Purpose: notifies creditors that not all partners are personally liable for partnership obligations

2. Name may not include surname of limited partner.

Rationale: limits apparent authority of limited partners

Certificate of Limited Partnership

A certificate of limited partnership must be filed with the secretary of state in order for limited partners to have liability protections.

Rationale: puts third parties (e.g., creditors) on notice of limited liability of limited partners

pass-through taxation

Caveat: must file informational tax return with IRS

□ Changes in Partnership Association

➢ Admission of New Partners

General Partners

admission = dissolution

unless unanimous written consent of all partners

Limited Partners

Additional investors may be admitted without dissolution.

Rationale: provides additional capital without change in management

□ Termination of Limited Partnership

Partnership may terminate if

1. All partners agree.

2. Partnership agreement has ending date.

3. Duration or purpose of partnership is complete.

4. Court orders dissolution.

5. General partner withdraws or dies.

General Partners

withdrawal = dissolution

Limited Partners

Withdrawal does not require dissolution, because limited partners are not active participants.

Termination has considerations as those for general partnerships,

plus notice of cancellation of limited partnership must be filed.

Limited Liability Partnerships

Managers without vicarious liability

□ Partners

1. All partners manage.

2. All partners are personally liable for

contracts

own negligence

but not for

negligence or malfeasance of other partners that they did not supervise or participate in.

□ Liability

Business Liability

All partners are liable to the amount of their investment for the contractual obligations of the partnerships

plus

Personal Liability

negligence or malfeasance of other partners that the partner participated in or supervised

□ Formation of Limited Liability Partnership

✓ Register an assumed business name.

✓ File a notice of partnership association, if required by state law.

✓ Obtain the required business and professional licenses and permits.

✓ Draft a comprehensive partnership agreement.

✓ Review taxation filings.

✓ Apply for sales tax permit, if goods will be sold.

✓ Apply for a tax identification number with IRS, the state, or both.

✓ Establish employee withholdings as well as unemployment and workers’ compensation coverage.

plus

➢ Name

LLP or llp must be designated in the name in order to notify public of limited liability of partners.

➢ Registration

File application for registration of LLP.

1. Form either general or limited partnership.

2. File application for registration of LLP.

Registration may expire after a period of time (five years), depending on state statute.

□ Taxation

partnership income = personal income of partners

Note: liability protections may defeat partnership taxation

□ Termination of Limited Liability Partnership

➢ Dissolution

Partner dissociates or involuntarily withdraws

(death, incapacity, bankruptcy).

Continuation of partnership

1. partnership agreement

The partnership agreement may provide for continuation of the partnership

2. buyout provision

Revised Uniform Partnership Act (RUPA): 90-day grace period when withdrawing partner may waive right to have partnership wound up.

➢ Winding Up

Completion of partnership business

1. Finish existing contracts.

2. Collect debts owed.

3. Pay obligations due to creditors, and so on.

File notice with secretary of state concerning termination of partnership.

Limited Liability Limited Partnerships

Hybrid: limited liability partnership and limited partnership

Key: All partners manage.

General Partners

manage without vicarious liability for negligence or malfeasance of other partners.

Limited Partners

manage and invest without vicarious liability for negligence or malfeasance of other partners.

□ Liability

Partners are liable for

1. partnership contracts

2. own negligence or malfeasance

□ Formation of Limited Liability Limited Partnerships

Form limited partnership

(or form LP simultaneous with forming LLLP)

Limited Partnership Associations

The most corporate-like form

of an unincorporated entity

Members and Managers

1. Limited partnership associations have limited duration.

2. Members have no personal liability

□ Liability

No personal liability for debts, obligations, or other liabilities

May jeopardize IRS status as partnership

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