A limited partnership (LP) consists of two or more partners with at least one general partner and one limited partner. In a limited partnership, a general partner has unlimited personal liability since he takes part in management but a limited partner’s maximum liability may extend only up to his registered investment in the partnership business and not beyond, because he does not participate in running of the business.
Sometimes the general partner in a LP is a corporation or a limited liability company (LLC).
The general partners have management control of the firm and have joint and several liability for the debts of the partnership. The general partners have unlimited personal liability for the debts and obligations of the firm.
Like shareholders in a corporation, a limited partner has limited liability, for the unpaid debts of the firm to the extent of his registered investment and has no management authority. The general partners pay the limited partner a return on his investment like dividend in terms of the partnership agreement.
Given the limited liability of a limited partner in LP, this form of organization is used as a vehicle to raise capital from wealthy persons. LP organization is most common in labor capital partnerships, real estate projects and film industry, where financial sponsors contribute capital, while the remaining partners do the actual work of the business.
The Uniform Limited Partnership Act (ULPA) of 1916 provided for the formation of limited partnerships. In 1976 the Revised Uniform Limited Partnership Act (RULPA) was adopted that was amended in 1985, to incorporate the provision of a limited partner taking control of the LP business. The Limited Partnership Act of any state governs limited partnerships domiciled in that jurisdiction. In limited partnership agreements parties can formulate their limited partnership relations in their own way to the extent permitted by the Limited Partnership Act of the concerned State.
According to the RULPA even a limited partner is deemed to control the business if he is on the board of directors. A limited partner becomes liable as a general partner when he takes control of the business.
When partnership is formed or the partner composition of the firm is changing, LPs are required to file documents with the concerned state registration office. LPs must also disclose their LP status when dealing with other parties, so that such outsiders are on notice that the person whom they are negotiating with has limited liability.
