CHAPTER 4 Limited Partnership.docx

CHAPTER 4 LIMITED PARTNERSHIP 1843 – A limited partnership Is one formed by two or more persons under the provisions of the following article, having as members one or more general partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership. Concept 

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Limited partnership – used to designate joint ventures and partnerships limited only in respect of the nature and scope of the business to be carried on. o Confines it to form of business association composed of one or more general partners and one more special partners, the latter not being personally liable for the partnership debt. A limited partner is composed of two classes of partners - general and limited It is called limited partnership because the liability to third persons of one or more of its members referred to as limited or special partner is limited to the a fixed amount, their capital contributions or the amount they have invested in the partnership. Limited liability is the key characteristic of the limited partnership

Characteristics of limited partnership   

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A limited partnership is formed by compliance with the statutory requirements (1844) One or more general partners control the business and are personally liable to the creditors (1848,1850) One or more limited partners contribute to the capital and share in the profits but do not participate in the management of the business and are not personally liable for partnership obligations beyond the amount of their capital contributions (1845, 1848, 1856) The limited partners may ask for the return of their capital contributions under the conditions prescribed by law (1844h,1857) The partnership debts are paid out of common fund and the individual propertied of the general partners

General Partners – treated by law much like a partner in an ordinary partnership 

Typically those who know how to manage the business

Limited Partners – usually those who put money for the business   

Mere investors Their limited liability is an exception to rule that all partners, including industrial partners, are liable pro rata with all their property for partnership debts (1816) A limited partner has the same type of liability as the stoke holder in a corporation

Business reason and purpose of statutes authorizing limited partnerships 

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Secure capital from others for one’s business and still retain control – men in the business often desire to secure capital from others. There are at least three classes of contracts which can be made with those from the capital is secured o Ordinary loan on interest o Loan where a lender, in lieu of interest, takes a share in the profits of the business (no risk of being held as a partner) o Those cases in which the person advancing the capital secures, besides a share in the profit, some measure of control over the business (has serious risk of being liable for the debts of the business as a partner) Share in profits of a business without risk of personal liability – policy os to bring into the trade and commerce funds of those not inclined to engage in that business, who are disposed to furnish capital upon such limited liability with a view to the share of profits which might be expected to result to them from its use. Associate as partners with those having business skill – purpose is to encourage those having capital to become partners with those having skill, by limiting the liability of the former to the incidental amount actually contributed by them. The object of such a statute is to furnish reasonable protection to those dealing with the concern by requiring acts to be done and public notice thereof given o that all who desire may know the essential features of the arrangements

Differences between a general partner/partnership and a limited partner/partnership General Partner is personally liable for the partnership obligations (1816) When manner of management has not been agreed upon, all of the general partners have an equal right in the management of the business (1802, 1810(3)), whether or not the general partner has made any capital contribution Partner may contribute money, property or industry to the partnership (1767) All are party to action against the partnership

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Limited Liability extends only to his capital contribution (1845,1848,4856) Has no share in the management of the limited partnership, his right being limited to those enumerated in 18511, such that he renders himself liable to creditors as a general partner if he takes part in the control of the business (1848) Must contribute cash or property to the partnership but not service or industry (1845) Partner is not a proper party to a proceeding by or against a partnership unless he is also a general

1851 – a limited partner shall have the same rights as a general partner to: 1. Have the partnership books kept at the principal place of business of the partnership, and at a reasonable hour to inspect and copy any of them 2. Have on demand true and full information of all things affecting the partnership, and a formal account of partnership affairs whenever circumstances render it just and reasonable 3. Have dissolution and winding up by decree of court A limited partner shall have the right to receive a share of the profits or other compensation by way of income, and to the return of his contribution as provided in 1856 and 1857

Partners interest in the partnership amy be assigned as to make the assignee a new partner without the consent of the other partners (1813) although he may associate a third person with him in his share (1804) Name of general partner may appear in the firm’s name (1815) General partner is prohibited from engaging in business which is of the kind of business in which the partnership is engaged, if he is a capitalist partner (1808) or in any business for himself if he is an industrial partner (1789) Retirement, death, insanity, or insolvency of a general partner dissolves the partnership (1860 1830 1831) General partnership, general rule, may be constituted in any form by contract or conduct of the parties Must operate under a firms name

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partner (1853), or where the object of the proceeding is to enforce a limited partner’s right against, or liability to, the partnership (1866) Interest is freely assignable, with the assignee acquiring all the rights of the limited partner subject to certain qualifications (1859)

General Rule: limited partner must not There is no such prohibition in case of limited partner who is considered as a mere contributor to the partnership (see 1866)2

It does not have the same effect, for executor or administrator shall have the rights of a limited partner for the purpose of selling his estate (1861) Limited partnership is created by the members after compliance with the requirements set for by the law Followed by the word “limited” Dissolution and winding up are governed by different rules a limited partnership, unless prohibited by law, may carry on any business which could be carried on by general partnership

1866 – A contributor, unless he is a general partner, is not a proper party to proceedings by or against a partnership, except where the object is to enforce a limited partner’s right against or liability to the partnership

Article 1844. Two or more persons desiring to form a limited partnership shall: (1) Sign and swear to a certificate, which shall state (a) The name of the partnership, adding thereto the word "Limited"; (b) The character of the business; (c) The location of the principal place of business; (d) The name and place of residence of each member, general and limited partners being respectively designated; (e) The term for which the partnership is to exist; ( f ) The amount of cash and a description of and the agreed value of the other property contributed by each limited partner; (g) The additional contributions, if any, to be made by each limited partner and the times at which or events on the happening of which they shall be made; (h) The time, if agreed upon, when the contribution of each limited partner is to be returned; (i) The share of the profits or the other compensation by way of income which each limited partner shall receive by reason of his contribution; ( j) The right, if given, of a limited partner to substitute an assignee as contributor in his place, and the terms and conditions of the substitution; (k) The right, if given, of the partners to admit additional limited partners; (l) The right, if given, of one or more of the limited partners to priority over other limited partners, as to contributions or as to compensation by way of income, and the nature of such priority; (m) The right, if given, of the remaining general partner or partners to continue the business on the death, retirement, civil interdiction, insanity or insolvency of a general partner; and (n) The right, if given, of a limited partner to demand and receive property other than cash in return for his contribution. (2) File for record the certificate in the Office of the Securities and Exchange Commission. A limited partnership is formed if there has been substantial compliance in good faith with the foregoing requirements.

Limited Partnership not created by mere voluntary agreement  

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it can only be created if permitted by statute – REASON – allows a person to share in profits without becoming personally liable creation of a limited partnership is a formal proceeding, the requirements of the stature must be followed o Reason – public notice be given to all who desire to know the essential features of the partnership Substantial compliance with the requirements – limited partnership is formed o Otherwise – limited partner will be treated as a general partner

Requirements for formation of limited partnership 

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2 essential requirements o Certificate or articles of the limited partnership which states the matters enumerated in the article, signed and sworn to o Certificate must be filed for record in the Office of SEC Purpose of filing with the SEC – to give actual or constructive notice to potential creditors or persons dealing with the partnership No time is fixed, a reasonable time is allowed depending on the circumstances of the particular case

Execution of the prescribed certificate   

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Certificate must contain the matters enumerated in the article Limited partnership cannot be constituted orally Purpose of specific requirements o Name, Contributions of Limited Partners, and Duration – for protection of those who deals with the firm, must be strictly observed o Certificate need not contain anything concerning the amounts to be contributed by the general partners