Limited Family Partnership Fundamentals

A limited family partnership has one or more general partners and one or more limited partners. The general partner(s) have the same rights (and liabilities) as other partners in the general partnership plus the right to manage the partnership. They also have unlimited personal liability for debts of the partnership, unlike limited partners that have no managerial authority.

The liability of a general partner is limited to their investment in the partnership and they are as insulated from partnership debts in the same way corporate stockholders are from corporate debts. But corporate stockholders can lose their corporate shares to a personal creditor while partners in a limited partnership cannot lose their limited partnership interest to a personal creditor. This major difference distinguishes the LP from a corporation.

General and limited partners in a LP contribute money, assets or services for their partnership interest and the general partner has complete authority to manage the limited partnership at their discretion.

Since the general partner can incur liability for partnership debts the general partner should be a corporation or LLC so that creditors of the LP can only pursue the assets of that corporation or LLC as the general partner and the assets of the individual general partners, stockholders or members would remain protected. The corporation or LLC (which owns only a nominal interest in the limited partnership) would then have only modest exposure. Other strategies exist that can safely protect the limited assets owned by the corporation or LLC to provide a comprehensive safety net from creditors and lawsuits.

Limited partnerships operate similarly to general partnerships in that limited partners contribute cash or other assets to the partnership and receive distributions based on their partnership interest. Limited partners cannot directly control the partnership or its assets and historically, limited partners were silent partner/investors that wished to remain anonymous without any active interest in running a business. The contemporary LP is not necessarily as identity cloaking but silent, invisible ownership remains a prominent feature.

Because a limited partner cannot manage a business or direct a general partner, the name of a limited partner should not be part of the partnership name, nor should a limited partner infer that as a limited partner that they manage the business. A limited partner can provide advisory to a general partner, but if a partner sustains both general and limited status they would have unlimited liability.

Limited partners are entitled to review the financial and legal records of a LP (in a similar way that corporate shareholders can inspect corporate records) and have access to the names of other partners, their addresses, contributions, shares in profits and losses, partnership tax returns and access business records not considered proprietary to the LP.

A general partner is required to provide each limited partner with annual tax information needed to complete their federal and state income tax returns and unless the partnership agreement says otherwise, limited partners cannot be obligated to add more capital to the LP. Also, one limited partner cannot have rights or authority over any other limited partner. These rights are stated in the Uniform Limited Partnership Act (ULPA), which has been adopted by all states.

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