Corporation How To

A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs).

The GPs are, in all major respects, in the same legal position as partners in a conventional firm, i.e. they have management control, share the profits of the firm in predefined proportions, and have joint and several liability for the debts of the partnership. As in a general partnership, the GPs have apparent authority as agents of the firm to bind all the other partners in contracts with third parties.

Like shareholders in a corporation, the LPs have limited liability, i.e. they are only liable on debts incurred by the firm to the extent of their registered investment, and they have no management authority. The GPs pay the LPs the equivalent of a dividend on their investment, the nature and extent of which is usually defined in the partnership agreement.

Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability.

Limited liability

When the partnership is being constituted or the composition of the firm is changing, LPs are generally required to file documents with the relevant state registration office. LPs must also explicitly disclose their LP status when dealing with other parties, so that such parties are on notice that the individual negotiating with them carries limited liability. It is customary that the notepaper, other documentation, and electronic materials issued to the public by the firm will carry a clear statement identifying the legal nature of the firm and listing the partners separately as general and limited. Hence, unlike the GPs, the LPs do not have inherent agency authority to bind the firm unless they are subsequently held out as agents and so create an agency by estoppel or acts of ratification by the firm create ostensible authority.

The limited liability enjoyed by LPs is contingent upon their refraining from taking any active role in the management of the firm. If LPs do assume a management role, they become GPs, and thus lose their limited liability protection and acquire the status of an agent.

History

The earliest limited partnerships were called societates publicanorum and arose in Rome in the third century B.C. During the heyday of the Roman Empire they were roughly equivalent to today’s major corporations: many had hundreds of investors, and interests were publicly tradable. However, they required at least one (and often several) partners with unlimited liability.

In medieval Italy, the concept was revived around the 10th century as the commenda, a business organization which was generally used for financing maritime trade. In a commenda, the traveling trader of the ship had unlimited liability, but his investment partners on land were shielded. A commenda was not a common form for a long-term business venture as most long-term businesses were still expected to be secured against the assets of their individual proprietors.^[1]

Colbert’s Ordinance of 1673 and the Napoleonic Code of 1807 reinforced the limited partnership concept in European law. In the United States, limited partnerships became widely available in the early 1800s, although a number of legal restrictions at the time made them unpopular for business ventures. Britain enacted its first limited partnership statute in 1907.^[2]

United States

In the United States, the LP organization is most common in the film industry or in types of businesses that focus on a single or limited-term project. They are also useful in “labor-capital” partnerships, where one or more financial backers prefer to contribute money or resources while the other partner performs the actual work. In such situations, liability is the driving concern behind the choice of LP status. The LP is also attractive to firms wishing to provide shares to many individuals without the additional tax liability of a corporation. Private equity companies almost exclusively use a combination of general and limited partners for their investment funds. Well-known limited partnerships include Carnegie Steel Company, Bloomberg L.P. and CNN.

In some states, an LP can elect to become a limited liability limited partnership (or LLLP). In this arrangement, the general partners are liable only for the business debts of the company, and not for acts of malpractice or other wrongdoing done by the other partners in the course of the partnership’s business.