In a limited partnership, each partner is liable for money they contributed towards the business. The remaining liability is extended towards the other partner(s). One of the main reasons partners would utilize this type of partnership is to minimize liability for the debts of the other partners.
A limited partnership is a business partnership formed by two or more individuals whereby one of the individuals is a general partner. Partners cannot be corporations. Property can be owned by limited partnerships.
Typically, limited partnerships are utilized for agreements with a limited timeframe.
Although being a partner in a partnership guarantees the same rights, one partner may hold more authority or liability than the other. Roles are defined based on a partner’s level of skill, capital contribution, and activity in the partnership. Both partners can contribute financially to a partnership, as well as purchase real property on behalf of a partnership.
Party’s in a Limited Partnership
A general partner is an active partner who is responsible for the day-to-day operations and management of a partnership’s business, including financial and developmental aspects. LLPs must have at least one general partner who bears liability for the partnership’s actions and obligations. A general partner is legally liable in the same way that owners of a simple partnership are liable.
A limited partner is a “silent partner” who is not involved in the management of the business. Typically, such a partner only invests capital into an LLP. It is illegal for a limited partner to indicate that he or she is a general partner, as such a statement is misleading to consumers and potential investors. Limited partners are protected from liability protection only when they do are not responsible for managing any tasks related to the transaction. If they do increase their role in an LLP, they may be treated as a general partner.
For example, assume Jon and Henry form a general partnership for the purpose of purchasing real estate. Henry contributes real estate expertise and connections to find properties, while Jon’s capital is used to purchase properties. In this scenario, Henry would likely be the general partner.
A partnership in which all partners have equal liability — and share in profits and losses equally — is called a general partnership.
Limited Liability Partnership
LLPs must be made in writing and clearly indicate each partner, its share, and its contribution towards the partnership. An LLP cannot advertise their business as a corporation, or in another manner not consistent with the true nature of its business. LLPs must include the term “A California Limited Partnership” when referencing the partnership.
LLPs must be registered with the Secretary of State’s office. If any changes are made to the LLP, partners should submit a form called LP-2. Foreign partners must file additional applications and have a principal office and agent of record in the state. All LLPs must pay yearly franchise dues to the state in order to conduct business in California.
Cancellation of an LLP requires partners to complete the LLP certificate of Cancellation (LP-4/7). There is no filing fee for cancellation.
Sample Case Relating to Limited Partnership
Case Review: BT-1 v. Equitable Life Assurance Society (1999)
The case, BT-1 v. Equitable Life Assurance Society (1999) 75 Cal.4th 1406., involved an LLP partner’s breach of fiduciary duty.
A partnership consisted of a general partner (Equitable Life Assurance Society) and a limited partner (BT-1). The partnership purchased a building with a sizable mortgage debt ($60 million). Later, Equitable Life was able to purchase the partnership’s mortgage debt at a reduced price of $38.5 million. It then demanded payment from BT-1, positioning itself as a lender in the partnership. When BT-1 could not pay, Equitable Life terminated the partnership. It foreclosed on the debt and the deed of trust, thereby becoming the sole owner of the building.
BT-1 brought legal action against Equitable Life for violating its fiduciary duties. The Superior Court argued that the partnership agreement granted a partner the right to purchase mortgage debt. Therefore, Equitable Life’s actions were permissible. The court ruled in favor of Equitable Life.
BT-1 appealed and won. The Court of Appeals ruled that a partner did not have the right to act as a lender on behalf of the partnership, unless otherwise noted in the agreement. Therefore, Equitable Life had violated its fiduciary duties in the partnership.
Limited Partnership in Real Estate
A limited partnership in the context of real estate is a group of two or more investors that form a partnership in order to collectively profit from the buying and selling of real estate. In a real estate limited partnership, there is a minimum of one limited partner and one general partner. The amount of partners can vary based on the terms of the partnership. Limited partners are liable only for the capital contribution personally invested and are not liable for more than their investment amount. The terms of the arrangement must be documented in writing. While each contract is different, most contracts contain an ethics or morality clause.
Limited partners contribute towards the capital investment of the partnerships, although they typically do not have authority over the investments. Authority is held by the general partner who is expected to fulfill the necessary duties or daily operations of the partnership. Limited partnerships are the preferred choice of inexperienced investors and silent partners whose only goals are to earn a rate of return.
Advantages of owning property in a limited partnership include lower tax rates and the potential to earn income without allocating significant amounts of time to the process. The drawback to limited partnerships for the limited partner is the minimal control available to exert in the investment. Limited partners must rely on the expertise of the general partner and cannot engage in the daily operations of the business. Should a limited partner enter the role of the general partner they will no longer be considered a limited partner and therefore will become liable in the same way as the general partner.