Master Limited Partnership

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 What is a Partnership?

Partnerships are defined under the model statute called The Revised Uniform Partnership Act (RUPA). Partnerships are associations of two or more individuals who carry on as co-owners of a business for profit.

The individuals in the partnership are not required to intend to create the partnership on purpose. There is only one requirement to form a partnership.

The requirement is that the individuals in the partnership intend to carry on as co-workers in a business for profit. Whether or not this has occurred may be determined by examining two factors, including:

  • Whether the individuals in the business share in the profits; and
  • Whether the individuals have the right to control the operation of the business.

For example, suppose Individual Y and Individual Z open a bakery. The two individuals split the profits of the barkery as well as make joint decisions regarding the business.

Although the individuals do not refer to themselves as partners, the bakery meets the definition required to form a partnership. Even though there are no other legal formalities that are required to be met in order to create a partnership, the majority of partnerships have a partnership agreement.

A partnership agreement is a written agreement between the individuals that outlines the relationship each partner has with the business as well as the rights and obligations each individual has to the partnership.

A partnership agreement may also contain the following elements:

  • The portion, or amount of the partnership that is owned by each partner;
  • Which partners have authority to make business decisions on behalf of the partnership and which do not;
  • The method that the partners will use to resolve any type of business dispute that arises among the partners;
  • Ways the partnership may be transferred or dissolved;
  • The process to add a new partner; and
  • Any other procedures or policies that the partners have in place to make major decisions or to handle important aspects of the partnership.

It is important that the agreement terms be clear and detailed. The agreement should provide solutions for each and every foreseeable or potential issue that may arise and potentially harm the business.

A partnership agreement may be formed orally, impliedly, by the partners’ actions, or in writing. It is always best to have a partnership agreement in writing.

If it is in writing, an agreement can act as a reference to quickly resolve disputes and can be used to solve any future legal issues if they arise.

What is a Limited Partnership?

Limited partnerships are specific types of partnerships that allow the limited partners to receive certain legal rights. The rights provided act as protection against individual liability claims for reasons including:

  • Debt;
  • Losses; or
  • Violations that are directly related to the overall limited partnership.

In a general partnership, in contrast, each partner is individually and jointly liable for the losses that are incurred by the partnership. This may, in some situations, put the partners at a disadvantage, especially if they play only a minor role in the partnership or if they have contributed less funds to the business than the other general partners.

Although the business is called a limited partnership, every limited partnership requires at least one general partner to be properly formed. The general partner will be responsible for making management decisions for the limited partnership and the day-to-day operations.

The limited partner only has limited powers over the partnership. They may only be held liable to the extent of their investment in the limited partnership.

Because of this, they are mainly responsible for investment duties relating to the limited partnership.

What are Fiduciary Duties in Partnerships?

In every partnership, each partner owes the other partners a fiduciary duty. A fiduciary duty is a type or trust.

The type of fiduciary duty that is owed may vary depending upon the nature of the partnership and what was included in the partnership agreement.

What is a Master Limited Partnership?

A Master Limited Partnership is a special category of limited partnership. Master Limited Partnerships are also referred to as MLPs.

Master Limited Partnerships are limited partnerships that are typically larger than a standard partnership and are publicly traded according to securities laws.

MLP status is restricted by United States federal laws. MLP status is typically only issued to businesses that involve the use or manipulation of natural resources.

Master limited partnerships may also include certain types of real estate partnerships.

What are the Benefits of an MLP?

As with any type of limited partnership, there are many benefits to filing as an MLP, which may include:

  • Avoiding corporate tax rates;
  • Reduced liability for limited partners, although parties also have restricted rights; and
  • Benefits associated with liquid securities that can be traded publicly.

In addition, MLPs tend to save costs on funding due to the nature of the business operations as well as the favorable tax implications.

What if I Have a Dispute that Involves a Limited Partnership?

One of the primary factors that separates the different types of partnerships is the amount of liability that can be attributed to each partner. The type of partnership will determine which of the partners can be held responsible for the financial losses of the partnership.

Typically, a limited partner is only liable to the extent of the investment they made to the limited partnership. However, if the partner was acting outside the scope of their duties as a limited partner, it is likely that they will be held personally liable for any injuries or losses that they caused.

For example, if the limited partner attempts to hold themselves out as if they are a general partner and starts making management decisions or represents as much to a third party, then they may be held personally liable for their actions. On the other hand, if the limited partner was acting within the scope of their duties, which are typically set forth by the terms of an entity’s partnership agreement, it is more likely that the limited partnership itself will be held responsible for any injuries or losses that result.

In certain cases, multiple partners in the partnership may be jointly liable either to the partnership or be held responsible for paying damages awarded to a plaintiff. This will depend on the individual facts surrounding each case as well as the liability agreement created between and entered into by the partner and their partnership organization.

What Legal Issues are Associated with Master Limited Partnerships?

One of the legal issues that may be associated with Master Limited Partnerships includes that the tax implications, although they are beneficial, may also be very complex. The distributions from a MLP to its members are subject to complex legal and tax determinations that may require legal assistance.

In addition, because MLPs tend to be larger organizations, the partners often have somewhat limited interests in the securities. Even the general partners may have somewhat smaller interests in comparison with other types of business forms.

Disputes over securities issues may arise in an MLP setting, which may require a lawsuit to resolve.

Do I Need a Lawyer for Help with MLP Issues?

A Master Limited Partnership is a highly specific type of business structure. It may be helpful to have the assistance of a corporate lawyer for any issues, questions, or concerns you may have regarding a master limited partnership or with any other types of business matters.

If a dispute arises related to your MLP, your attorney can help you file a lawsuit. If a lawsuit becomes necessary, your lawyer will represent you throughout the process.

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