In order to understand limited partnerships, it may be helpful to understand partnerships in general. Partnerships are associations of two or more individuals who carry on as co-owners of businesses for profit.
Partnerships are formed when the parties to a business have the ability to share in the profits as well as have a right to control the business. The parties are then said to be partners.
There are three different categories of partnerships, including:
- General partnerships;
- Limited liability partnerships (LLPs); and
- Limited partnerships (LPs).
The type of partnership that is formed will determine the amount of liability that individual partners may face by being a part of the partnership.
What is a Limited Partnership?
General partners have more responsibility. They are in charge of the management and operation of the limited partnership.
Limited partners have fewer duties and rights than general partners. However, limited partners are still able to reap some of the benefits of the partnership.
A limited partnership is only required to have one general partner but there can be more if required. In many cases, a business chooses to form as a limited partnership because of the favorable tax benefits as well as the limited liability that the partners enjoy.
In general, limited partners cannot be held liable for losses which the business experiences. The rights of the limited partners act as protection against individual liability claims which are directly related to the overall partnership, including:
- Losses; or
Limited partners only have limited powers related to the partnership. In addition, they can only be held liable up to the extent of their investment in the limited partnership.
Limited partners are mainly responsible for investment duties related to the limited partnership. In a general partnership, in contrast, each of the partners is individually and jointly liable for the losses which are incurred by the partnership.
This may, in some cases, put the partners at a disadvantage. This is especially true if that partner only plays a minor role in the partnership or if they contributed fewer funds to the business than other general partners.
What is a Partnership Agreement?
Partnership agreements are legal contracts which outline the rights and duties of general and limited partners. Partnership agreements often include certain information, including, but not limited to:
- Information regarding each partner;
- The duties and responsibilities of the partners;
- The allocation of profits and losses for the each partner;
- The scope of the partnership’s functions and activities;
- The goals and mission statements of the partnership;
- Restrictions on management and leadership;
- Instructions regarding dispute resolution; and
- Instructions governing terminating the partnership.
Some agreements also contain clauses regarding the procedures for resolving legal disputes. For example, an agreement may require that a dispute be resolved by an alternative method of dispute resolution, such as arbitration.
It is important to have partnership agreements in writing. This is because when a lawsuit is filed, the court will most likely refer to the written partnership agreement in order to determine the outcome of the legal dispute.
The partnership agreement provides legal enforcement for the terms of the operation of the limited partnership.
Is it Possible to Withdraw From a Limited Partnership?
In contrast to a general partnership, a partner in a limited partnership is permitted to withdraw from the business without subjecting the partnership to an automatic dissolution. This is one important feature which distinguishes limited partnerships from general partnerships.
If a limited partner decides to withdraw from the limited partnership, they are required to notify the partnership as well as to file the necessary paperwork, or the documents which are associated with the withdrawal, with the state in which the partnership operates. In addition, the remaining partners in the limited partnership will be required to buy out the partner who is withdrawing.
On the other hand, if a partner withdraws from a general partnership, it will typically result in the dissolution, or termination, of that partnership. General partnerships may also be dissolved when any of the partners become incapacitated or pass away.
What Are Some Limited Partnership Disputes?
Similar to any type of business structure, a limited partnership may experience various legal disputes, for example:
- Disputes between general and limited partners;
- Disputes over allocation of benefits;
- Internal disputes regarding the direction and aims of the overall partnerships; and
- Legal violations, such as:
- tax fraud;
- securities fraud; and
- other types of white-collar crime.
Another common dispute in limited partnerships is terminations. A limited liability partnership is less prone to dissolution than other types of partnerships because limited partnerships will not automatically terminate if one partner withdraws, as noted above.
How Are Limited Partnership Disputes Resolved?
As noted above, one of the primary differences which separates all three partnerships is the amount of liability which can be attributed to each of the partners. This helps to determine which of the partners should be held responsible for the financial losses the partnership suffers.
Typically, a limited partner is only liable to the extent of the investment which they made to the limited partnership. If, however, the partner was acting outside of the scope of their duties as a limited partner, they will likely be held personally liable for any losses or injuries which they caused.
For example, if the limited partner attempts to hold themselves out as being a general partner and begins making management decisions or represents as much to a third party, they may be held personally liable for their actions. If, on the other hand, the limited partner was acting within the scope of their duties, it is more likely that the limited partnership itself will be responsible for any losses or injuries which result.
In the majority of cases, the duties of the limited partners are set forth by the terms of the partnership agreement. In certain cases, more than one partner may be jointly liable either to the partnership or may be held jointly responsible for paying damages which are awarded to the plaintiff.
This will depend upon the individual facts and circumstances of the case as well as the liability agreement that was created and entered into by the partner and the partnership organization. In many cases, limited partnerships have internal mechanisms for resolving disputes which arise.
These mechanisms are often discussed in the partnership bylaws or various contracts between the members. If these do not resolve the dispute, it may be necessary to file a legal claim.
This way, a court can intervene and make various rulings which help clarify the situation. A limited partnership lawsuit often results in damages awards which will allow the plaintiff to recover for losses they have experienced.
Do I Need a Lawyer for Help with Limited Partnership Laws?
A limited partnership is required to follow very specific business formation laws. It may be helpful to consult with a corporate lawyer if you need assistance starting a limited partnership or if you have any legal issues involving one.
Your attorney can ensure your limited partnership is properly formed and provide you with guidance for your legal issues. Your attorney can also provide you with representation if you need to file a lawsuit.