Limited Partnership

A limited partnership is a form of business entity created under state law, in which one or more general partners manage the business and bear personal liability for its obligations, and one or more limited partners contribute capital and are shielded from that liability. It differs from a general partnership in that it has to be filed into existence: under the Uniform Limited Partnership Act, "to form a limited partnership, a person must deliver a certificate of limited partnership to the Secretary of State for filing," and the partnership is formed only when that certificate takes effect and the partnership has at least one general and one limited partner. The uniform act is a model, drafted by the Uniform Law Commission, so the rules that govern any particular limited partnership are those of the state it was organized in, which may adopt the model, amend it, or keep an older version.

The certificate is the entity's public record, and the uniform act specifies what it has to say: the partnership's name, the street and mailing addresses of its principal office, the name and address of its registered agent in the state, the name and address of each general partner, and whether the partnership is a limited liability limited partnership. Notice what is missing. The limited partners are not named on it, and neither is anyone's economic share. Those live in the partnership agreement, which is private. That asymmetry is one reason the form persists for investment funds and family holding structures: the public filing identifies the people with authority, and the private agreement carries the economics.

The liability split is the point of the form, and the modern rule is more protective than the one most people half-remember. Section 303(a) of the 2001 act provides that a debt of the partnership "is not the debt, obligation, or other liability of a limited partner," and that a limited partner is not personally liable "solely by reason of being or acting as a limited partner, even if the limited partner participates in the management and control of the limited partnership." That last clause is a deliberate change. Earlier uniform acts contained what the drafters call the control rule, under which a limited partner who took part in controlling the business could be exposed to a general partner's liability; the 2001 act's own comment describes eliminating it as discarding an anachronism in a world that already had limited liability companies and limited liability partnerships. Whether a given limited partner enjoys the newer rule or the older one depends on which version of the statute the state of organization has enacted, which is a question for the governing statute rather than the model.

The general partner's position is the mirror image. Section 404(a) makes all general partners "liable jointly and severally for all debts, obligations, and other liabilities of the limited partnership unless otherwise agreed by the claimant or provided by law," and the words "agreed by the claimant" matter: it is the creditor who has to agree to a limit, not the partners among themselves. The usual workaround is structural. Either the general partner interest is held by a corporation or a limited liability company that has its own shield, so that no individual stands behind the debts, or the partnership elects to be a limited liability limited partnership, which under section 404(c) makes partnership obligations "solely the debt, obligation, or other liability of the limited liability limited partnership" and removes the general partner's personal exposure for them. The certificate has to say whether that election is in place, which is why it is one of the five required items.

A limited partnership is a state-law entity, not a tax status, and the two questions are answered by different bodies of law. For federal tax purposes a limited partnership is ordinarily treated as a partnership, filing Form 1065 and passing its results to the partners, but that treatment comes from the tax code rather than from the certificate. Two familiar structures are limited partnerships wearing particular clothes: a family limited partnership is an ordinary limited partnership whose partners are relatives, and a master limited partnership is one whose interests trade on a public exchange, which brings a set of federal tax tests that have nothing to do with state entity law. Private equity, venture capital and real estate syndication funds are commonly organized this way for the same reason families use it: the managers need authority and the investors need a ceiling on their exposure.

1. Draft the partnership agreement. It sets the economics, the management rights, the admission and withdrawal rules and the distribution waterfall. It is private and is where almost all the negotiated substance sits.

2. File the certificate of limited partnership. It names the partnership, its principal office, its registered agent, each general partner, and whether the partnership elects limited liability limited partnership status.

3. Admit at least one general and one limited partner. The uniform act treats the partnership as formed only when the certificate is effective and both classes exist.

4. The general partner manages and is personally liable for partnership obligations, jointly and severally with any other general partner, unless the limited liability limited partnership election is in place.

5. Limited partners contribute capital and take distributions, with no personal liability for partnership debts beyond their contribution, and without losing that protection merely by participating in management under the modern uniform rule.

Consider an example. Three investors and a sponsor form a limited partnership to buy a small apartment building. The sponsor contributes $50,000 for a 1 percent general partner interest and manages the property; the three investors contribute $500,000 between them for limited partner interests totaling 99 percent. The building later loses a lawsuit and owes $900,000 more than the partnership's assets and insurance can cover. The three limited partners can lose the $500,000 they contributed and nothing beyond it, even though one of them had been attending management meetings and approving budgets. The sponsor, as general partner, is exposed to the whole shortfall personally unless the general partner interest sits inside a corporation or limited liability company, or the partnership filed as a limited liability limited partnership.

Pros

• The liability ceiling is the design. A limited partner's downside stops at what they contributed.
• Authority is concentrated. One general partner can act for the business without collecting consents from every investor, which is why fund structures use the form.
• The economics stay private. The public certificate names the general partners and the registered agent; the splits live in the partnership agreement.
• The modern uniform act removed the trap that a limited partner forfeits the shield by getting involved in management.
• The limited liability limited partnership election can close the general partner's personal exposure without changing the entity.

Cons

• Somebody has to be the general partner, and under the default rule that person is personally liable for everything the partnership owes.
• It cannot be created by handshake. A missed or defective filing means the intended limited partners may be partners in something else entirely.
• Limited partners get protection by giving up control, and in practice the agreement rather than the statute decides how much say they have.
• The governing rules vary by state, so the shield a reader has heard described is the model act's, not necessarily their own state's.
• The form carries filing fees, a registered agent and annual or biennial reports that a general partnership does not.