Withdrawing from a Limited Partnership

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 What is a Partnership?

Partnerships are ways in which businesses can be structured. Partnerships are formed when two or more individuals carry on as co-workers in a business that is for profit.

Partnerships are formed when the individuals who operate the business share in the profits of the business as well as the rights to control the business. Individuals who engage in businesses in this way will be considered partners whether or not they intended to form a partnership.

There are three different kinds of partnerships, including:

  • General partnerships;
  • Limited liability partnerships (LLPs); and
  • Limited partnerships (LPs).

The way in which a business is structured will determine the liability that the partners are subject to as part of the partnership.

What is a Limited Partnership?

A partnership is a common type of business entity. A Limited Partnership (LP) has both general and limited partners.

Limited partners can be considered similar to silent investors, but with some differences. Limited partners invest money into the business but do not participate in the day-to-day operations of the business.

A limited partnership provides the partners with some legal protections and rights. These protections protect the partners from liability claims for which they would be personally responsible and may include issues such as:

  • Debt;
  • Losses; and
  • Violations directly related to the limited partnership.

A limited partnership is distinguishable from a general partnership. In general partnerships, each partner is jointly and severally liable for losses that are incurred by the partnership. A general partnership may place some partners at a disadvantage, especially if the partner plays only a minor role or makes a smaller investment than the other partners.

A limited partnership is required to have one general partner at minimum in order to be properly formed. This general partner is responsible for the daily operations of the business as well as management decisions.

Limited partners, on the other hand, have only limited powers in the business. Limited partners may only be held liable for losses up to the amount which they invested in the business. Limited partners are typically only responsible for investment duties in the business.

The requirements for limited partnerships vary by state. For example, some states require limited partnerships to have partnership agreements.

What is a Partnership Agreement?

A partnership agreement is a legal contract that outlines the duties and rights of general and limited partners. Partnership agreements typically include the following information:

  • Information regarding each partner, including their name, contact information, etc;
  • The duties and responsibilities of the partners;
  • The allocation of profits and losses for the partners, which are typically equal amongst partners;
  • 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 partnership agreements may also contain a clause regarding the procedures in the event of a legal dispute. For example, the agreement may provide that the dispute should be resolved by an alternative method of dispute resolution, such as arbitration.

A partnership agreement provides legal enforcement for the terms of the operation of the partnership. It is important to have a partnership agreement in writing.

A partnership agreement may be used in the event of a lawsuit or other legal dispute that may arise out of the activities of the partners and partnership. If a lawsuit is filed, a court will most likely refer to the written partnership agreement in order to determine the outcome of a dispute.

What are some Disputes that may Arise in a Limited Partnership?

Similar to any other type of business structure, a limited partnership may experience legal disputes. Disputes may involve issues including:

  • Disputes between a general and a limited partner;
  • Disputes over the allocation of benefits;
  • An internal dispute regarding the direction and aim of the partnerships; and
  • Legal violations including:
    • tax fraud;
    • securities fraud; and
    • other types of white-collar crime.

Another common issue that arises in limited partnerships is terminations. A termination is not as detrimental to a limited partnership, as the loss of a limited partner does not necessarily cause the partnership to dissolve. However, withdrawal of a partner may still cause legal issues.

How are Limited Partnership Disputes Resolved?

In many cases, the limited partnership has an internal mechanism for resolving disputes that arise. These mechanisms are often included in the partnership bylaws and contracts between the members, including the partnership agreement.

If the internal mechanisms are not effective at resolving the dispute, a legal claim may be necessary. At this time, a court may intervene and make rulings and determinations that clarify the situation. A lawsuit involving a limited partnership may result in a damages award that allows the plaintiff to recover damages for any losses they have incurred.

What Does it Mean to Withdraw from a Limited Partnership?

In a normal partnership, when one partner withdraws, or leaves the company, the partnership dissolves. This is not the case, however, with limited partnerships.

Because a limited partner does not take part in the management of the business, the limited partner can withdraw from their role as partner without causing the partnership to dissolve. Limited partners can also dissolve their roles as limited partners if they take a more active role in the management of the business. When this occurs, the limited partner is no longer considered as such and may be liable in the same way a general partner would be.

Limited partnerships may also be dissolved if a general partner withdraws from the partnership, retires, or passes away. In some cases, however, the written partnership agreement may specify otherwise.

What Do I Need to Do in Order to Withdraw My Role as a Limited Partner?

If an individual needs to withdraw from their role as a limited partner, they may be required to file a dissolution form in the state in which the company does business. Typically, filing this form with the state is sufficient and the limited partner will not be required to give notice to the business’ customers, clients, or suppliers.

The dissolution form may require signatures of approval from the business’ general partners. Although the general partner or partners may consent to the withdrawal, they could be reluctant to lose the limited partner’s financial contribution. If this occurs, the limited partner may consider attempting to sell their investment to another partner or to another individual.

What If the General Partners Resist My Withdrawal?

In some cases, a general partner may be unwilling to buy out the limited partner’s interest or may try to prevent the limited partner from withdrawing. In these instances, the limited partner should review the details of their partnership agreement to determine what relief may be available to them.

Do I Need an Attorney when Withdrawing from a Limited Partnership?

It is important to have the assistance of an experienced corporate attorney when you are withdrawing from a limited partnership. The requirements may vary by state and an attorney is best equipped to know the local laws where the business operates.

Withdrawing from the role of limited partner may be complicated and you may face resistance from the general partners. Your attorney can help you interpret the partnership agreement and provide your advice regarding what steps to take. Your attorney can also help protect your rights as you withdraw from a limited partnership.

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