Business Law 101 / Limited Partnerships Create Lower Liability For Some Members
There are two final business types to discuss: Limited partnerships and limited liability companies. Both combine aspects of partnerships with aspects of corporations, and both create lower liability for some members. We will discuss the Limited Partnership this week and start on Limited Liability Companies next week.
A limited partnership allows for the development of a partnership with lower levels of liability for certain members of the partnership. It is run by a general partner who has full authority over the partnership and full responsibility for the affairs of the partnership. The partnership also has what are called limited partners, who are more like shareholders. Their liability for debt of the partnership is limited to their investment in the partnership. However, the limited partners can have no control over the day to day operations of the partnership. Their participation is in their investment.
Unlike a general partnership, the personal assets of a limited partner are protected from judgments against the partnership. Also unlike a general partnership, a limited partnership requires more effort to start up operations. The limited partnership must follow the language in the Revised Uniform Limited Partnership Act (RULPA). This Act requires the Limited Partnership to register with the Department of State and identify all partners, their classification and interest. Some states allow the limited partnership to keep the names of the limited partners confidential. If the requirements of the RULPA are not fully complied with, the partnership may be deemed a general partnership and each member, including the limited partners, will be fully liable for all debts of the partnership.
Limited Partnerships allow limited partners to make additional contributions without losing their limited protections, so long as they do not exercise any control over the partnership business. What can limited partners do? Limited partners may consult with the general partners, act as employees or independent contractors for the business, and vote on certain matters without losing their protections. The limited partner may also file suit against the partnership if the general partners fail to act in a manner consistent with the goals of the partnership. The name of the limited partner cannot be used in the name of the Limited Partnership. In other words, if I were a limited partner, the name of the partnership could not be “Albert L. Kelley Limited Partnership.”
Related to this is the Limited Liability Limited Partnership (LLLP). These are generally created to own property, but can be used for other purposes. By creating this type of business entity, you can limit the liability of both the limited partners and the general partner. The obligations of the partnership remain just that — obligations of the partnership and not of the individual partner, regardless of them being limited or general partners. As an example, CNN (the news channel) is an LLLP. The LLLP has only been around for about 15 years and is not recognized in all states (Florida was one of the first states to recognize this business entity type).
The other way to get around the liability of the general partner was to create two entities. The first was the limited partnership and the second was a limited liability company. The limited partners would elect the LLC to act as a general partner. It would not have any assets and, therefore, would be judgment proof. Because the limited partners have no liability, and the LLC was judgment proof, the Limited Partnership could proceed without concern about any liability.
Because the LP and the LLLP are actual partnerships, by their very nature they MUST have at least two members. Single member partnerships do not exists.
Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.[livemarket market_name="KONK Life LiveMarket" limit=3 category=“” show_signup=0 show_more=0]