279
Woodrow Wilson
I. Teacher to Teacher Dialogue
many centuries and crosses many cultures. Limited partnerships remain, in many ways, the best
of both worlds. They can provide the flexibility of partnership while affording limited liability
exposure to investors. But as with all deals that seem too good to be true, there is no free lunch.
The rules of the legal road must be strictly complied with and failure to do so leads to severe
consequences.
investor would be liable for no more than his investment.
Investment is the key to the original notion of limited partnership. The idea was to create a
middle ground between pure partnership and an entity with a totally autonomous existence. In the
Middle Ages when limited partnerships were first used, the corporate form of business was
corporation law.
Today’s modern laws of limited partnerships are found in two key statutes: the original 1916
Uniform Limited Partnership Act and its heir apparent, the Revised Uniform Limited Partnership
Act first promulgated in 1976. Even though there are substantial differences between the two
versions, they remain the same with regard to several key provisions:
2. Both call for two key classes of partners to be in place: at least one general partner with
3. Both statutes generally limit the amount of activity a limited partner may engage in
LIMITED PARTNERSHIPS AND
SPECIAL PARTNERSHIPS
35
Chapter 35
4. Both use the general partnership principles of the Uniform Partnership Act as a fallback
position if their respective statutory requirements are not complied with.
In both scenarios, the basic intent of the statutory scheme is the same as was found in the
early French versions of partnerships in commendam. That intent was to raise capital investment
One other undeniably important factor in this equation has been the Internal Revenue Code.
Up until 1986, the tax code strongly favored the use of limited partnerships as a means to tax
shelter income through what came to be known as PILs (passive investment losses). With the
There are three basic sets of issues of the law of limited partnerships: formation, the rights
II. Chapter Objectives
1. Define a limited partnership.
2. Describe the process for forming a limited partnership.
III. Key Question Checklist
Was the limited partnership properly formed?
IV. Text Materials
Introduction to Limited Partnerships and Special Partnerships
In most states, the formation, operation, and termination of limited partnerships are regulated by
Limited Partnership
Limited Partnerships and Special Partnerships
Limited or special partnerships have two types of partners, general and limited. The general
partners invest capital, manage the business, and have unlimited personal liability for all
partnership debts, while limited partners invest capital but have no management participation, and
Revised Uniform Limited Partnership Act – This created a uniform set of laws covering the
Certificate of Limited Partnership – Two or more persons must execute the certificate of
limited partnership which should include the name, general character of the business, address of
the principal place of business, latest date for dissolution, and the identity and contact information
Foreign Limited Partnership – A limited partnership is considered to be domestic in the state in
Capital Contributions – Capital contributions may include cash, property, services, or a
Defective Formation – Defects in the filing of or actual certificate may be corrected through
Limited Partnership Agreement – The limited partnership agreement or articles of limited
Rights to Information – Every limited partner has the right to obtain full information on the
Admission of a New Partner – New limited partners can only be added by the unanimous
Business Environment: Master Limited Partnership
A MLP is a limited partnership whose limited partnership interests are traded on organized
Chapter 35
depreciation on their personal tax returns.
Liability of General and Limited Partners
General partners have unlimited personal liability for all debts and obligations of the limited
Liability of General Partners – The general partners of a limited partnership have unlimited
liability for the debts and obligations of the limited partnerships.
Liability of Limited Partners – Limited partners are liable only for the debts and obligations of
Liability on a Personal Guarantee – If a limited partner serves as a surety for a loan to the
Management of a Limited Partnership
Permissible Activities of Limited Partners – The RULPA clarifies the types of activities that a
limited partner may engage in without losing his or her limited liability.
Business Environment: Modern Rule Permits Limited Partners to Participate in Management
without losing their limited liability shield.
Limited Liability Limited Partnership
LLLPs are creatures of state statutes. They are created by filing an article of limited liability
Dissolution of a Limited Partnership
Causes of Dissolution – A limited partnership can be dissolved by reaching the end of its defined
life, the written consent of all members, the withdrawal of a general partner, and by entry of a
Limited Partnerships and Special Partnerships
Winding Up – Upon dissolution, any partner may petition the court to wind up the affairs of a
limited partnership.
Distribution of Assets – The proceeds of assets are distributed first to creditors, including
distributed.
V. Key Terms and Concepts
dissolution of a limited partnership.
Certificate of limited liability limited partnership—An LLLP may be organized under state
law by filing articles of limited liability limited partnership with the secretary of state’s
office. If all filing documents are correct and the proper fee is paid, the state will issue a
certificate of limited liability limited partnership.
business in a foreign state.
Control rule—The general rule is that limited partners who take part in the management of
the affairs of a limited partnership who have not been expressly elected to office to do so lose
their limited liability shield and become general partners and are personally liable for the
debts and obligations of the limited partnership. This is called the control rule.
partnership agreement.
Defective formation—Occurs when (1) a certificate of limited partnership is not properly
Distribution of assets of a limited partnership—After the assets of a limited partnership have
Domestic limited liability limited partnership—An LLLP is a domestic limited liability
limited partnership in the state in which it is formed.
Domestic limited partnership—A limited partnership in the state in which it was formed.
Foreign limited liability limited partnership—An LLLP is a foreign limited liability limited
was formed.
General partner—Partners in a limited partnership who invest capital, manage the business,
and are personally liable for partnership debts.
Chapter 35
obligations of a limited partnership.
Limited partner—Partners in a limited partnership who invest capital but do not participate in
management and are not personally liable for partnership debts beyond their capital
contributions.
Limited partnership—A type of partnership that has two types of partners: (1) general
partners and (2) limited partners.
the limited partnership and the limited partnership defaults on the loan, the creditor may
enforce the personal guarantee and recover payment from the limited partner who personally
guaranteed the repayment of the loan.
Quarterly required distributions—MLPs pay their investors quarterly required distributions
limited partnerships.
Section 303 of the RULPA—The new Section 303 of the RULPA eliminates this restriction
and permits limited partners to participate in the management of a limited partnership without
losing their limited liability shield.
Uniform Limited Partnership Act—This uniform law was passed in 1916.
limited partnership.
Winding up—A limited partnership must wind up its affairs upon dissolution.