978-1133019145 Chapter 4 Solution Manual

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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

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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.

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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

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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-

• 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

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• 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

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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.

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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?

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

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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?

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?

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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?