Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
22
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
CHAPTER 4
Limited Partnerships
THEME
Chapter 4 serves as an introduction to limited
partnerships, focusing on the nature of limited
partnerships and the differences between limited
partnerships and general partnerships. Limited
liability limited partnerships are discussed in
Chapter 5.
CHAPTER GOAL
The goal of this chapter is for students to be-
come familiar with the following terms and
topics concerning limited partnerships:
• Limited partnership, limited partner, and
general partner
• The differences between general partnerships
and limited partnerships
• General and limited partner rights and re-
sponsibilities
• Advantages and disadvantages of doing
business as a limited partnership compared
to other forms of business organization
• Limited partnership organization and man-
agement and the importance of the limited
partnership certificate and limited partner-
ship agreement
• Formalities for forming, operating, and dis-
solving a limited partnership
• The role of the paralegal who works with
limited partnerships
• Resources for further research regarding
limited partnerships
SUGGESTED APPROACH
The discussion in this chapter is based on the
Revised Uniform Limited Partnership Act, with
occasional comparisons to the newer Uniform
Limited Partnership Act adopted in 2001. As of
late 2011, most states had adopted the 1976 Re-
vised Uniform Limited Partnership Act with
1985 amendments
(RULPA). A few states have adopted the Uni-
form Limited Partnership Act of 2001.
Students should be encouraged to lo-
cate the limited partnership act of their home
state. They can check to see what statutory
requirements exist for filing the limited part-
nership certificate with the secretary of state
or other appropriate state agency in their home
state.
It is important that students understand
the restrictions placed on limited partners with
regard to taking part in the control of the limited
partnership under the RULPA. Several different
hypothetical situations concerning the involve-
ment of a limited partner in the partnership
business could be discussed to see if the students
can determine whether the limited partner may
be in danger of losing his or her limited liability
status in states that follow the RULPA. Note
that this restriction does not necessarily apply to
limited partnerships in states that follow the
newer Uniform Limited Partnership Act of
2001.
LECTURE NOTES
An Introduction to Limited Partnerships
1. Limited partnerships are a special type of
partnership created under state statutes.
Limited partnerships have one or more
general partners and one or more limited
partners.
2. The status of a limited partnership’s gen-
eral partners is very similar to that of the
partners of a general partnership.
3. Limited partners are, in many ways, more
like investors than partners.
4. A limited partner’s risk is limited to that
partner’s investment in the limited partner-
ship.
5. Under the RULPA, limited partners are not
entitled to participate in the management of
CHAPTER 4 Limited Partnerships 23
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
the limited partnership’s business. This re-
striction has been lifted in the Uniform
Limited Partnership Act of 2001.
6. Limited partnerships are considered sepa-
rate entities for most purposes.
7. Limited partnerships have been popular in
the United States mainly because of the tax
advantages they offer. Limited partners can
invest in a limited partnership without the
risk of personal liability.
8. With the increasing availability of new
forms of limited liability business organi-
zations, limited partnerships are losing
some of their popularity.
9. The first uniform limited partnership act
was introduced in 1916. The Revised Uni-
form Limited Partnership Act (RULPA)
was introduced in 1976 and amended in
1985. A new act—the Uniform Limited
Partnership Act of 2001—was introduced
in 2001. As of late 2011, most states in the
country have adopted a version of the
RULPA with 1985 amendments. A few
have recently adopted the Uniform Limited
Partnership Act of 2001.
10. Some states have amended their statutes in
recent years to include provisions for lim-
ited liability limited partnerships.
Partners’ Rights and Responsibilities
11. All limited partnerships must have at least
one general partner who has personal re-
sponsibility for the debts and obligations of
the limited partnership. The rights and re-
sponsibilities of the general partner are
generally the same as the rights and re-
sponsibilities of a partner of a general part-
nership.
12. All limited partnerships must have at least
one limited partner who is not personally
liable for the debts and obligations of the
limited partnership. Limited partners have
few of the rights granted to partners in a
general partnership, and, correspondingly,
few of the responsibilities.
13. One individual may be both a limited and a
general partner. In that event, the partner
will have the rights and responsibilities of a
general partner, but that partner’s contribu-
tion as a limited partner will be protected as
that of a limited partner.
14. The interest of a limited partner is consid-
ered personal property, even if the partner-
ship assets include land.
15. Under the RULPA, limited partners have
no right to participate in the management
of the partnership business. Limited part-
ners who do take part in the control of the
partnership may lose their limited liability
status. Under the RULPA, the following
actions do not necessarily indicate that the
limited partner is taking part in control:
• Being a contractor for or an agent or
employee of the limited partnership or
of a general partner; or being an officer,
director, or shareholder of a general
partner that is a corporation
• Consulting with and advising a general
partner with respect to the business of
the limited partnership
• Acting as a surety for the limited part-
nership or guaranteeing or assuming
one or more specific obligations of the
limited partnership
• Taking any action required or permitted
by law to bring or pursue a derivative
action in the right of the limited part-
nership
• Requesting or attending a meeting of
partners
• Winding up the limited partnership
• Exercising any right or power permit-
ted to limited partners under the RUL-
PA and not specifically enumerated in
this subsection
16. Although limited partners have no right
to exert control over the limited partner-
ship, they are entitled to vote on certain
extraordinary actions taken by the limited
partnership.
24 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
17. The Uniform Limited Partnership Act of
2001 differs substantially from the RULPA
where limited partnership participation in
management is concerned. Under the Uni-
form Limited Partnership Act of 2001, lim-
ited partners are not personally liable for
obligations of the limited partnership “even
if the limited partner participates in the
management and control of the limited
partnership.”
18. Because limited partners rely on general
partners to manage the limited partnership,
general partners owe a fiduciary duty to
limited partners.
Advantages of Doing Business as a Limited
Partnership
19. Some of the advantages of doing business
as a limited partnership compared to other
types of business organizations are as fol-
lows:
• The limited liability available for lim-
ited partners gives limited partnerships
an advantage over other partnerships
and sole proprietorships.
• The flow-through income taxation of
limited partnerships is beneficial to
most business owners.
• Compared to interests in general part-
nerships, the interest of limited partners
can be more freely transferred.
• Limited partnerships offer more busi-
ness continuity than either general
partnerships or sole proprietorships.
• Compared to sole proprietorships and
general partnerships, it may be easier to
raise capital for limited partnerships
because there must be more than one
initial investor, and subsequent inves-
tors may be sold limited partner inter-
ests.
Disadvantages of Doing Business as a Lim-
ited Partnership
20. There are also several disadvantages to do-
ing business as a limited partnership
compared to other forms of business organ-
ization, including the following:
• Because in most states limited partners
may not participate in the management
of the limited partnership, limited part-
nerships do not enjoy the same flexibil-
ity of management as other forms of
business organizations.
• Unlike the general partnership, the lim-
ited partnership must be formed by fil-
ing the appropriate documentation with
the secretary of state or other designat-
ed state authority.
• Legal and organizational expenses for
forming and operating a limited part-
nership may be significant.
Organization and Management of a Limited
Partnership
21. The limited partnership certificate is the
document filed with the secretary of state
or other appropriate state authority to form
the limited partnership.
22. The limited partnership certificate usually
includes the minimum information required
by statute, with more detailed information
included in the limited partnership agree-
ment. Under the RULPA, the following in-
formation must be included in the limited
partnership certificate:
• The name of the partnership
• The office address and the name and
address of the agent for service of pro-
cess
• The name and business address of each
general partner
• The latest date upon which the limited
partnership is to dissolve
23. Under the Uniform Limited Partnership
Act of 2001, the following information
must be included in the limited partnership
certificate:
• The name of the limited partnership
• The street and mailing address of the
initial designated office and the name
CHAPTER 4 Limited Partnerships 25
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
and the street and mailing address of
the initial agent for service of process
• The name and the street and mailing
address of each general partner
• Whether the limited partnership is a
limited liability partnership
• Any additional information required by
Article 11 (This article concerns con-
versions and mergers.)
24. When certain information in the limited
partnership certificate changes, an amend-
ment to the certificate must be filed. Most
amendments to the limited partnership cer-
tificate must be approved by all general and
limited partners.
25. The RULPA requires that the following
documents be kept at a designated partner-
ship office:
• Current lists of the names and address-
es of general and limited partners
• Copies of the certificate of limited part-
nership and any amendments thereto
• Copies of the limited partnership’s in-
come tax returns and financial state-
ments for the three most recent years
• Copies of all effective written partner-
ship agreements
26. The Uniform Limited Partnership Act of
2001 requires that the following documents
must be kept at a designated partnership of-
fice:
• A current alphabetical list of the names
and address of each partner, identifying
the general partners and limited partners
• A copy of the certificate of limited
partnership and any amendments there-
to
• A copy of any filed articles of conver-
sion or merger
• Copies of the limited partnership’s tax
returns, annual reports, and financial
statements for the three most recent
years
• Copies of the limited partnership
agreement and any amendments thereto
• Copies of any records made by the lim-
ited partnership for the past three years
of any consent given or votes taken by
the partners pursuant to the partnership
agreement
27. The following information, if it is not set
forth in the limited partnership agreement,
must be kept in writing at the limited part-
nership’s office for inspection by all
partners:
• The amount and description of the con-
tributions made by each partner
• Conditions under which additional con-
tributions must be made by the partners
• Description of the rights of partners to
receive distributions, including returns
on all or any part of the partner’s con-
tribution
• A description of the events causing a
dissolved limited partnership to dis-
solve
• A record including information concern-
ing the transferable interest of any per-
son who is both a general and a limited
partner (required by the Uniform Lim-
ited Partnership Act of 2001)
28. The limited partnership agreement encom-
passes the entire agreement among the
partners. Because it is not filed for public
record, the limited partnership agreement is
typically much more detailed than the lim-
ited partnership certificate.
29. The following topics are usually addressed
in the limited partnership agreement:
• Name of the limited partnership
• Name and address of each partner and
his or her general or limited partner
designation
• Purpose of the limited partnership
• Address of the principal place of busi-
ness of the limited partnership
• Duration of the limited partnership
• Amounts and descriptions of contribu-
tions made by both general and limited
partners
26 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
• Description of the limited partnership
assets
• Liability of general and limited partners
to each other and to third parties
• Distribution of profits and losses to
general and limited partners
• Indemnification of partners
• Duties of general and limited partners
• Limited partners’ rights of substitution
• Limitations on the power of the part-
ners
• General partner compensation
• Partnership expenses
• Management and control of the busi-
ness by the general partners
• Business policies of the limited part-
nership, and the rights of limited part-
ners to review those business policies
• Accounting practices and procedures
• Changes in general or limited partners
by withdrawal, expulsion, retirement,
or death
• Sale or purchase of limited partnership
interests
• Termination of the limited partnership
• Dissolution and winding up
• Date of agreement and the signatures of
all partners
Changes in the Limited Partnership
30. New general partners are usually admitted
to the partnership only with the written
consent of all partners or by other means
set forth in the limited partnership agree-
ment.
31. Additional limited partners may be added
in compliance with the limited partnership
agreement.
32. The death or withdrawal of a general part-
ner generally causes the dissolution of the
limited partnership, unless the limited part-
nership agreement provides otherwise.
33. A general partner who withdraws in viola-
tion of the limited partnership agreement
may be liable to the other partners for dam-
ages caused by his or her withdrawal.
34. The death or withdrawal of a limited part-
ner generally does not cause the dissolution
of the limited partnership. Limited partners
may usually withdraw from the limited
partnership in compliance with the limited
partnership agreement.
Financial Structure of a Limited Partnership
35. Limited partners must make a contribution
to the limited partnership, and that contri-
bution is placed at risk.
36. The profits and losses of the limited part-
nership are shared as provided in the lim-
ited partnership certificate or limited part-
nership agreement. If the formula for allo-
cating profits and losses is not specified in
the limited partnership certificate or limited
partnership agreement, the profits and loss-
es are allocated on the basis of the value of
the contributions made by the partners to
the extent they have not been returned.
37. The income of the limited partnership is
reinvested in the limited partnership or dis-
bursed to the partners pursuant to the lim-
ited partnership agreement.
38. Distributions may not be made to the part-
ners if, after those distributions, the part-
nership’s liabilities exceed the partner-
ship’s assets.
39. The limited partnership’s income (or loss)
is reported annually to the IRS on Form
1065 (Partnership Return). Form 1065 re-
ports the income allocated to each partner.
40. Partners must report and pay income tax on
their share of the limited partnership’s in-
come, whether or not that income was dis-
tributed to them.
Limited Partnership Dissociation, Dissolution,
and Winding Up
41. The RULPA provides that the limited part-
nership is dissolved, and its affairs must be
CHAPTER 4 Limited Partnerships 27
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
wound up, when one of the following
events first occurs:
• The time period specified in the certifi-
cate expires.
• Specific events set forth in the partner-
ship certificate occur.
• All the partners consent in writing to
dissolve the partnership.
• An event of withdrawal of a general
partner occurs.
• A decree of judicial dissolution is en-
tered.
42. When the limited partnership dissolves, the
limited partnership certificate must be can-
celled by filing a cancellation of certificate
of limited partnership, signed by all general
partners, with the secretary of state or other
appropriate state authority.
43. The business of the limited partnership
may be wound up by any general partner
who has not caused a wrongful dissolution.
If there is no such general partner, the lim-
ited partnership may be wound up by any
limited partner.
44. In most states, statutes provide that the as-
sets of a dissolving limited partnership
must be paid out until they are exhausted in
the following order:
(1) To creditors to satisfy liabilities of the
limited partnership
(2) To partners to satisfy distributions due
them under the partnership agreement
(3) To partners as a return of their contri-
butions
(4) To partners as a return of their partner-
ship interest in the same proportion in
which partners share distributions
Derivative Actions
45. Under the RULPA, limited partners have
the right to bring derivative actions in the
right of a limited partnership to recover a
judgment in its favor. Derivative actions
may be brought on behalf of the limited
partnership if the general partners with au
thority have refused to bring an action, or if
an effort to cause those general partners to
bring the action is not likely to succeed.
Family Limited Partnerships
46. Family limited partnerships are often used
for estate-planning purposes. They are typ-
ically funded with family businesses or
other family assets.
47. Assets held in a family limited partnership
can be protected from creditors and others
to a certain extent.
The Paralegal’s Role
48. Paralegals often assist with drafting and
filing the limited partnership agreement
and with other formalities that must be fol-
lowed by limited partnerships.
Resources
49. Some of the more important resources for
paralegals who work with limited partner-
ships include state statutes, legal form
books and forms found online, information
from the secretary of state or other appro-
priate state agency, government taxation
offices, and online resources.
CASE BRIEFS
Commonwealth of Pennsylvania, Department of
Revenue for the Bureau of Accounts Settlement
v. McKelvey, et al., 587 A.2d 693 (PA 1991)
Purpose: This case is a straightforward example
of how the limited partner of a limited partner-
ship is sheltered from personal liability for the
debts and obligations of the limited partnership.
Cause of Action: Petition to strike tax lien
Facts: This is an appeal from a lower court de-
cision denying appellant’s petition to strike a tax
lien.
Peter Bradley (the “Appellant”) was a
limited partner of Different Spokes, a limited
partnership formed to own and operate a retail
bicycle business. Appellant provided an
$18,000.00 loan to the business. As a limited
partner, he took no part in the operation or man-
agement of the bicycle shop.
28 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
The Department of Revenue of the
Commonwealth of Pennsylvania (“Appellee”)
was notified of Appellant’s status as a limited
partner in the business on an application for
sales, use, and hotel occupancy license that was
filed by the general partner with the Appellee.
On October 10, 1985, Appellee mailed a
Notice of Sales and Use Tax Assessment to the
business address of Different Spokes for a total
assessment of $27,974.21. No challenge was
made to the assessment nor was the assessment
paid. In April of 1986, Appellee issued liens in
the amount of $27,974.21 against the business
and its general and limited partners. Appellant,
who had not been individually notified of the
assessment by the Appellee, did not discover the
lien had been filed until he applied for a mort-
gage several months later. Appellant filed a Peti-
mined its jurisdiction was limited to the question
of whether or not Appellant had received notice
of the assessment. The Common Pleas Court
held that notice to the partnership constituted
notice to the Appellant, and therefore the Appel-
lant had received notice. His petition to strike
the tax lien was denied.
Appellant filed an appeal to the Com-
entered against as a limited partner.” In the case
at hand, Appellant appealed that decision.
Issue: Did Appellant receive actual notice of a
tax assessment against the business in which he
was a limited partner when such notice was sent
to the limited partnership at its business address?
As a limited partner, is Appellant liable for a
partnership debt?
Holding: The court in this case held that the
Appellant had not received notice of the tax as-
sessment and that he was not liable for the tax
obligation of the limited partnership. The lower
court’s decision was reversed.
Reasoning: The Pennsylvania Supreme Court
found that notice to a limited partnership can
never constitute notice to a limited partner, be-
cause, by definition, limited partners do not take
part in the control or management of the part-
nership business. Even assuming proper notice
to Appellant, under Pennsylvania law, a limited
partner is not liable for the obligations of the
limited partnership.
REVIEW QUESTIONS
1. Is a limited partnership treated as a separate
entity for all purposes?
No
If not, give an example of an instance in
which a limited partnership is treated as an
aggregate of its partners.
2. Why is the fiduciary duty between the gen-
eral partner and limited partners even
greater than the fiduciary duty between
partners in a general partnership?
Because general partners are in control
of the limited partnership and limited
partners are prohibited from participat-
3. Suppose that Beth Henderson is a limited
partner of the ABC Limited Partnership, a
limited partnership formed for the purpose
of purchasing and developing real estate.
Beth wanted to be a limited partner because
she has considerable personal assets that
she wants to protect. Soon after the for-
mation of the limited partnership, Beth be-
comes concerned about its management by
the general partners. She starts attending the
general partners’ meetings and participating
in all major decisions concerning the lim-
ited partnership. However, the partnership
CHAPTER 4 Limited Partnerships 29
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
becomes insolvent anyway. Creditors are
left with thousands of dollars’ worth of un-
paid bills. The limited partnership and the
general partners have no substantial cash or
other assets. If the limited partnership is in
a state that follows the RULPA, might
creditors prevail in a lawsuit against Beth
Why or why not?
Even though it was Beth Henderson’s in-
tent to protect her personal assets by es-
tablishing herself as a limited partner,
the degree of her participation in the
4. Brian, Jeanne, and William have formed
OakRidge Limited Partnership, a limited
partnership for shopping center develop-
ment and management. William is the gen-
eral partner and Brian and Jeanne are lim-
Uniform Limited Partnership Act, would
Brian and Jeanne be able to guarantee the
obligation of the OakRidge Limited Part-
nership without risking their limited liabil-
vised Uniform Limited Partnership Act.
of owning and operating a liquor store.
They are all concerned about their personal
liability, so they decide that they will all be
limited partners. Would this be possible?
No
Why or why not?
A limited partnership must have at least
What if Jill agreed to be both a general
partner and a limited partner?
Yes
6. Why might a limited partnership want to
put only the minimum required infor-
The limited partnership certificate is a
document that is made a public record.
Information that the partners would
prefer to keep confidential should be put
into the limited partnership agreement
7. What is one advantage the limited partner-
ship has over the general partnership with
regard to raising capital for the business?
8. Who may initiate a derivative action?
30 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
and Paige, the limited partners, have each
contributed $3,000. After one year of oper-
ation, the arcade has debts of $10,000, and
the three partners decide to discontinue
their business and the limited partnership.
Brianna and Paige want their investment
returned to them. Who should Katherine,
who is winding up the business, pay first—
Brianna and Paige, or the creditors?
If the state of the limited partnership fol-
How much will Brianna and Paige receive?
If there are sufficient assets to cover
the debt of the partnership, Brianna
and Paige would then receive any dis-
tributions due to them under the part-
How about Katherine?
Again, if there are sufficient assets to cov-
er the partnership debt, Katherine would
receive distributions due to her and a re-
turn of her contribution ($2,000). Howev-
10. Suppose a limited partnership has just one
general partner, who suddenly dies. Will
the partnership dissolve?
Yes
Could a limited partnership continue if one
of three general partners suddenly dies?
Yes
If yes, under what circumstances?
SUGGESTED ANSWERS TO
PRACTICAL PROBLEMS
The Practical Problems in this chapter ask stu-
dents to research the limited partnership laws of
their home states to answer several questions
concerning the limited partnership act that has
been adopted. Students are also asked to begin
looking at the formalities that must be followed
to form a limited partnership in their home
Resources for answering Problem 1 in-
clude the following:
1. State statutes (See list in the Resources sec-
tion of the text; links to the state limited
partnership acts can be found on the
CourseMate website that accompanies this
accompanies this text at
http://www.cengagebrain.com.)
EXERCISE IN CRITICAL
THINKING
The Exercise in Critical Thinking for this chap-
Exercise:
In general partnerships, every partner
has the statutory right to participate in
the management of the partnership.
Why do you think limited partners
are prohibited from participating in
the management of the limited
partnership in some states?
Why do you think some states have
adopted statutes that specifically
CHAPTER 4 Limited Partnerships 31
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
provide that limited partners do not
lose their limited liability status just
because they participate in the
partnership’s management?
SUGGESTIONS AND SAMPLE
DOCUMENTS FOR THE WORK-
PLACE SCENARIO
In this exercise, students are asked to prepare
a limited partnership certificate to form a hy-
pothetical limited partnership in their home
state. Students may use forms downloaded
from the CourseMate website that accompa-
nies this text at http://www.cengagebrain.com,
from the secretary of state’s website in their
state, or they can prepare their own documents
based on the limited partnership act in their
home state. Appendix E is a sample limited
partnership certificate that could be filed in
any state that follows the RULPA. Appropri-
ate cover letters for filing the limited partner-
ship certificate should also be prepared.
Students completing this exercise should
learn what documentation is needed to form a
limited partnership, where that documentation is
filed, and what other formalities may be
required.
