Joined: 31 Jan 2005
|Posted: Thu Mar 10, 2016 7:26 am Post subject: Lecture for 3/11/16: Additional Partnership Formations
|CHAPTER 35: LIMITED PARTNERSHIPS
TWO TYPES OF PARTNERS:
GENERAL PARTNERS: Invest capital, manage the business, and are personally liable for partnership debts,
LIMITED PARTNERS: Invest capital; do not participate in management not personally liable for partnership debts beyond their capital contribution.
Must have at least one general partner and one limited partner.
Typically used such business ventures as: Real Estate Investments, drilling oil and gas wells, investing in movie productions, and the like.
No restrictions on the number of general or limited partners allowed in a limited partnership. Any person may be a general or limited partner. This includes natural persons, partnerships, limited partnerships, trusts, estates, associations, and corporations. A person may be both a general and limited partner in the same limited partnership.
A corporation may be the sole general partner of a limited partnership. Shareholders of corporations are liable only up to their capital contributions. Where permissible, it affects the liability of the limited partnership. This is because the limited partners are liable only to the extent of their capital contributions, and the corporation acting as general partner is liable only to the extent of its assets. The following case demonstrates this concept.
CASE PRESENTED NOT IN TEXT: (Frigidaire Sales)
CALIFORNIA 1/1/03 ALLOWED THIS ALSO
LIABILITY OF GENERAL PARTNERS
CASE # 35.1 PAGE 591
LIABILITY OF LIMITED PARTNERS
CASE # 35.5 PAGE 591-2
LIMITED PARTNERSHIP CREATION AND FURTHER REQUIREMENTS
Statutory and formal requiring public disclosure. Certificate of Limited Partnership filed w/in proper state agencies must have at least two/more persons execute and sign certificate of limited partnership
P. 583 For Contents of the Certificate
Must keep certificate current by filing necessary certificates of amendment, so as to apprise creditors and others of current information. Typical reasons for filing amendments:
1. A change in a partner's capital contribution.
2. The admission of a new partner.
3. The withdrawal of a partner.
4. The continuation of the business after a judicial decision dissolving the limited partnership after the withdrawal of the last general partner.
Corporate General Partner
CASE # 35.2 PAGE 591
By General and limited partners may be in cash, property, services rendered, or a promissory note or other obligation to contribute cash or property or to perform services
A partner or creditor of the limited partnership may bring a lawsuit to enforce a promise to make a contribution [RULPA § 502(a)].
NAME OF THE LIMITED PARTNERSHIP
P. 584 For several requirements of non-inclusion:
May not include surname of a limited partner unless: (1) Also surname of a general partner; or the business was carried on under that name before the admission of the limited partner.
Limited partner who knowingly permits surname used in violation of this provision becomes liable as a general partner to any creditors who extend credit to the partnership without actual knowledge of true status
Other name restrictions: on the of a limited partnership
Cannot be same as or deceptively similar to the names of corporations or other limited partnerships
States can designate words that cannot be used in limited partnership names, name must contain without abbreviation the words limited partnership.
PARTNERSHIP AGREEMENTS ALSO CALLED THE ARTICLES OF LIMITED PARTNERSHIP
Legally not required, good practice for the partners to draft and execute Setting forth rights and duties of the general and limited partners; the terms and conditions regarding operation, termination, and dissolution of the partnership; etc. If no such agreement, certificate of limited partnership serves as the articles of limited partnership.
When: Certificate of limited partnership not properly filed, (2) Defects in certificate that is filed, or (3) some other statutory requirement for creation of limited partnership not met.
Limited partnership deemed to have been properly formed if "substantial compliance in good faith" w/statutory requirements. Defect in compliance not affect rights between partners. Even if court finds limited partnership not been created, rights and duties of partners are determined from defective certificate of limited partnership and the limited partnership agreement.
SUBSTANTIAL DEFECT IN THE CREATION OF A LIMITED PARTNERSHIP
PERSONS ERRONEOUSLY BELIEVING THEMSELVES TO BE LIMITED PARTNERS
Thought they were limited partners can find themselves liable as general partners. Erroneously but in good faith believe they have become limited partners can escape liability as general partners by either (1) Causing appropriate certificate of limited partnership (or certificate of amendment) to be filed or (2) Withdrawing from any future equity participation in the enterprise and causing a certificate showing this withdrawal to be filed.
Nevertheless, limited partner remains liable to any third party who transacts business with the enterprise before either certificate is filed if third person believed in good faith that the partner was a general partner at the time of the transaction
LIABILITY OF PARTNERS
See Case #35.3 Page 591
FOREIGN LIMITED PARTNERSHIPS
Domestic limited partnership in state organized. Foreign limited partnership in all other states. Law of state entity organized governs its organization, its internal affairs, and the liability of limited partners [RULPA § 901].
REGISTRATION OF FOREIGN LIMITED PARTNERSHIPS
Before transacting business must file an application for registration with the secretary of state. If application conforms with law, a certificate of registration permitting foreign limited partnership transact business will be issued.
Once registered may use courts of foreign state to enforce contracts and other rights. Failure to register neither impairs validity of any act or contract nor prevent it from defending itself in any proceeding in courts of foreign state. However, may not initiate litigation in foreign jurisdiction.
Limited partner's status not affected by whether registered or unregistered. EXAMPLE, foreign limited partnership failed to register in foreign state and causes an injury to someone in that state, the limited partners are not personally liable [RULPA §907].
Foreign Limited Partnership
See Case #35.4 Page 591
DRAWBACKS TO LIMITED PARTNERSHIPS AND MLP'S
One Major drawback for limited partners investors is their investment usually not liquid because no readily available market for buying/selling limited partnership interests. The introduction of master limited partnerships (MLPs) is changing this situation. MLP is a limited partnership whose limited partnership interests are traded on organized securities exchanges such as the New York Stock Exchange. Often, MLPs are created by corporations that transfer certain corporate assets (such as real estate) to an MLP then sell limited partnership interests to the public.
Corporation usually remains as general partner.
Some MLPs formed to make original investments.
Owning limited partnership interest in an MLP rather than corporate stock. MLPs pay no income tax—partnership income and losses flow directly onto individual partner's income tax return. Profit and other distributions of MLPs also avoid double taxation of corporate dividends. Use of master limited partnerships is expected to increase in the future.
LIABILITY OF GENERAL AND LIMITED PARTNERS
General partners of limited partnership have unlimited personal liability for the debts and obligations. Extends to debts that cannot be satisfied with existing capital of the limited partnership. Generally, limited partners liable only for debts and obligations of limited partnership up to their capital contributions.
LIMITED PARTNERS PARTICIPATION IN MANAGEMENT
Trade-off for limited liability: give up right to participate in control and management. This means, in part, limited partners have no right to bind partnership to contracts or other obligations.
Limited partner liable as general partner if his/her participation in control of business substantially same as that of general partner, but limited partner liable only to persons who reasonably believe to be general partner [RULPA § 303(a)].
PERMISSIBLE ACTIVITIES OF LIMITED PARTNERS
W/O LOSING LIMITED LIABILITY.
See P. 587
ENTREPRENEUR AND THE LAW
LIMITED PARTNER LIABLE ON PERSONAL GUARANTEE
Small businesses including limited partnerships, attempt to borrow money from banks or obtain extension of credit from suppliers. Often these lenders require owners of small businesses to personally guarantee this loan; or extensions of credit not made.
CASE PRESENTED IN CLASS (STOVER)
Exceptions to the general rule
Limited partners are not individually liable for the obligations or conduct of the partnership beyond the amount of their capital contribution. Limited partners are individually liable for the debts, obligations, and tortious acts of the partnership in three situations: 1. Defective Formation There has not been substantial compliance in good faith with the statutory requirements to create a limited partnership. Exception: Persons who erroneously believed themselves to be limited partners either (1) caused the appropriate certificate of limited partnership or amendment thereto to be filed or (2) withdrew from any future equity participation in the profits of the partnership and caused a certificate of withdrawal to be filed. 2. Participation in Management The limited partner participated in the management and control of the partnership. Exception: The limited partner was properly employed by the partnership as a manager or executive. 3. Personal Guarantee The limited partner signed an enforceable personal guarantee that guarantees the performance of the limited partnership.
Rights, powers, duties, and responsibilities are specified in articles of limited partnership or the certificate of limited partnership, the states limited partnership statute, and the common law.
General partners of a limited partnership have same rights, duties, and powers as partners in a general partnership.
SHARE OF PROFITS AND LOSSES
Limited partnership Agreement may specify how profits and losses are to be allocated among general and limited partners. If no such agreement: Profits and losses shared on basis of value of partners capital contribution. Limited partner not liable for losses beyond capital contribution.
EXAMPLES Four general partners, each contributes $50,000 in capital, and four limited partners, each contributes $200,000 capital. The total: $1 million. Limited partnership agreement not stipulate how profits and losses to be allocated. Limited partnership makes $3 million in profits. Each general partner would receive $150,000 profit, while each limited partner would receive $600,000. But Instead loses $3 million. Each limited partner suffers a loss of $200,000 (up to his or her capital contribution); Each general partner would suffer personal loss of $500,000 (after his or her capital of $50,000 each is used to pay the debt).
RIGHT TO INFORMATION FOR LIMITED PARTNERS FROM GENERAL PARTNERS
Upon reasonable demand: True and full information regarding the state of the business, the financial condition of the limited partnership, and so on.
Additionally limited partnership must keep the following records at its principal office:
1. A copy of the certificate of limited partnership and all amendments thereto.
2. A list of the full names and business addresses of each partner.
3. Copies of effective written limited partnership agreements.
4. Copies of federal, state, and local income tax returns.
5. Copies of financial statements of the limited partnership for the three most recent years.
Good practice to establish voting rights in the limited partnership agreement or certificate of limited partnership. Can stipulate which transactions must be approved by which partners (i.e., general, limited, or both)
General and limited partners may be given unequal voting rights.
ADMISSION AND WITHDRAWAL OF PARTNERS
ADMISSION: Once formed, new limited partner added only upon the written consent of all partners unless the limited partnership agreement provides otherwise.
New general partners can be admitted only with the specific written consent of each partner. Limited partnership agreement cannot waive right of partners to approve the admission of new general partners. Admission effective when amendment is filed. [RULPA § 301].
Removal of a General Partner
Case presented in class (Axtec)
Only (1) at a time stated in the certificate, (2) upon the happening of event stated in certificate, or, (3) if no time or event stated upon six months' prior notice to each general partner [RULPA § 603].
Any time by giving written notice to other partners. If withdrawal violates limited partnership agreement, liable to limited partnership for damages caused by withdrawal. Damages may be offset against the amount owed to withdrawing partner by limited partnership.
ALL WITHDRAWING PARTNERS
Entitled to receive any distribution (including a return of capital) due under the limited partnership agreement; also entitled to receive, w/in reasonable time fair value of their interest in limited partnership as of date of withdrawal; limited by amount partnership assets exceed partnership liabilities.
DISSOLUTION AND WINDING-UP
Maybe dissolved and affairs wound up just like an ordinary
Certificate of cancellation must be filed by limited partnership w/secretary of state of state in which the limited partnership is organized.
CAUSES OF DISSOLUTION
Following four events
END OF THE LIFE of the limited partnership as specified in the certificate of limited partnership i.e., at the end of a set time period or the completion of a project.
WRITTEN CONSENT of all general and limited partners.
W/DRAWYL OF GENERAL PARTNER: Includes retirement, death, bankruptcy, adjudged insanity, or removal of a general partner or the assignment by general partner of partnership interest. IF CORPORATION OR PARTNERSHIP IS A GENERAL PARTNER,
Dissolution of corporation or partnership considered withdrawal.
THE ENTRY OF A DECREE OF JUDICIAL DISSOLUTION: May be granted to partner whenever not reasonably practical to carry on the business in conformity with the limited partnership agreement. EXAMPLE: General partners are deadlocked over important decisions affecting the limited partnership.
BUT COMPARE: Limited partnership not dissolved upon the w/drawyl of a general partner if: Certificate of limited partnership permits business to be carried on by the remaining general partner or partners or (2) w/in 90 days of withdrawal all partners agree in writing to continue the business (and select a general partner or partners, if necessary)
Llimited partnership must wind up affairs upon dissolution. Unless otherwise provided in limited partnership agreement.
May be wound up by general partners who have not acted wrongfully or, if there are none, the limited partners. Any partner may petition Court to wind up the affairs of a limited partnership
Partner who winds up affairs of limited partnership has same rights, powers, and duties as partner winding up ordinary partnership.
DISTRIBUTION OF ASSETS UPON WINDING UP
After the assets liquidated, proceeds must be distributed.
Creditors, including partners who are creditors (except for liabilities for distributions)
Partners with respect to :a. Unpaid distributions b. Capital contributions c. The remainder of the proceeds
Partners may provide in the agreement for a different distribution among partners, but creditors must retain
their first priority.
See Case #35.6 Page 592
See Case #35.7 Page 592
LIMITED LIABILITY LIMITED PARTNERSHIP (LLP) STARTS P. 667
SEE CHART P. 668
Provides limited liability to all partners.
No general partner in an LLP.
Limited liability partnership (LLP) A type of partnership that has no general partner. All partners have limited liability. general partners Partners in a limited partnership who invest capital, manage the business, and are personally liable for partnership debts, limited partners Partners in a limited partnership who invest capital but do not participate in management and are not personally liable for partnership debts beyond their capital contributions.
Many states have enacted legislation to permit creation of limited liability partner-(LLPs). Does not have to be a general partner who is personally liable for debts and obligations. Instead, all partners are limited partners who stand to lose only their capital contribution should the partnership fail. None of the partners personally liable for debts and obligations of the partnership beyond Capital contribution
Enjoy "flow-through" tax benefit of other types of partnerships, that is, no tax paid at partnership level and all profits and losses reported on individual partners' income tax returns.
ARTICLES OF PARTNERSHIP LLPs
Must be created formally by filing articles of partnership with the Secretary of state of state organized. It's a public document.
Domestic LLP in state organized. Law of the state governs the operation of the LLP. May do business in other states, however, must register as foreign LLP in any state in which it wants to conduct business.
Required In most states. Limited liability partnership law restricts the use of LLPs to certain types of professionals, such as accountants and lawyers. Many state laws require LLPs to carry a minimum $l million liability insurance that covers negligence, wrongful acts, and misconduct by partners or employees of the LLP. Guarantees injured third parties will have compensation to recover for their injuries and is a quid pro quo for permitting partners of LLPs to have limited liability.
INTERESTING READ ABOUT ACCOUNTING FIRMS:
Prior accounting firms operated as general partnerships. General partners, therefore, were personally liable for debts/obligations of general partnership. In Large accounting firms, this personal liability was rarely imposed, because the general partnership usually carried sufficient liability insurance to cover most awards to third-party plaintiffs in negligence tort actions. Creditors usually extended credit to the large accounting firms based on reputation of firms and the fact that these large accounting firms had sufficient capital in the partnership to meet most loan obligations. Beginning in the early 1980s, large accounting firms were hit with many large court judgments. These cases were brought in conjunction with the failure of large savings banks and commercial banks and the failure of other large firms that accountants had audited. Many of these firms failed because of fraud by their major owners and officers. The shareholders and creditors of these failed companies sued the auditors, alleging that the auditors had been negligent in not catching the fraud. Many juries agreed and awarded large sums against the accounting firms. Sometimes the accounting firm's liability insurance was not enough to cover the judgment, thus imposing personal liability on partners. General partners in accounting firms became worried that the inability of the profession to shield itself from such liability jeopardized the profession. In response, in the 1990s state legislatures created a new form of business, the limited liability partnership (LLP). This entity was particularly created for accountants, lawyers, and other professionals to offer their services under an umbrella of limited liability. The partners of an LLP have limited liability up to their capital contribution; the partners do not have personal liability for the debts and liabilities of the LLP, however. Once LLPs were permitted by law, all of the Big Five accounting firms changed their status from general partnerships to LLPs. The signs and letterheads of the Big Five accounting firms prominently announce that the accounting firm is an "LLP." Many accounting firms other than the Big Five have also changed over to LLP status, as have many law firms. The LLP form of business has changed how accountants, lawyers, and other professionals offer their services.
Lawsuit by a Limited Partnership
See Case #35.6 Page 592
See Case #35.7 Page 592
Limited Liability Limited Partnerships (LLLP)
LLLPs are creatures of state statutes. They are created by filing an article of limited liability limited partnership with the Secretary of State.
These require at least one limited partner, but this general partner is not jointly and severally liable for the debts of the LLLP; instead, they are the responsibility of the entity.
FOR INFORMATION ONLY:
SEE BELOW THE LLLP IS FOR INFORMATION ONLY SEE YOUR TEXTBOOK FOR THE CHARACTERISTICS.
CA. Limited Liability Limited Partnership (LLLP) InstanceEndEditable
An LLLP is a new modification of the limited partnership. Similar to a limited partnership, the LLLP consists of one or more general partners and one or more limited partners. The key advantage of this form of ownership is that the general partners receive limited liability on the debts and obligations of the LLLP. California law does not allow for an LLLP to be formed in California. However, an LLLP that is formed under the laws of another state must register with the California Secretary of State prior to conducting business in the state.
• The general partners manage the business operations of the LLLP, while the limited partners typically only maintain a financial interest.
• The LLLP is a flexible form of business.
• It is designed to offer limited liability to all partners in the partnership.
• The partners will decide the structure of the organization and the distribution of profits and losses. A formal, written partnership agreement is advisable.
• An LLLP does not pay income tax. However an LLLP must pay an annual tax of $800. The items of income, deductions, and credits "flow down" from the partnership to each partner through the Schedule K-1. Each partner is responsible for paying taxes on their distributive share.
• An LLLP remains in in existence until any agreed upon termination date.
• Every LLLP that engages in a trade or business in California or earns income from California sources and every LLLP that registers with the California Secretary of State is required to file California Form 565.
• The LLLP provides each partner with a schedule K-1 that states the partner’s distributive share of the partnership's (LLLP's) items of income, deductions, and credits.
• The return due date is the 15th day of the 4th month after the close of the taxable year.
• An LLLP must pay an annual tax of $800.
• No estimated tax requirements.
The LLLP may be required to withhold taxes if the partnership distributes California source taxable income to a nonresident partner. For more information about partnership withholding, see FTB 1017.
SEE PAGE 590 FOR DIAGRAM OF LLLP