The Law of Corporations and Other Business Organizations

Lecture Notes

1. Limited partnerships are a special type of
partnership created under state statutes.
Limited partnerships have one or more
general partners and one or more limited
partners.
2. The status of a limited partnership’s general
partners is very similar to that of the
partners of a general partnership.
3. Limited partners are, in many ways, more
like investors than partners.
4. A limited partner’s risk is limited to that
partner’s investment in the limited partnership.
5. Under the RULPA, limited partners are not
entitled to participate in the management of
the limited partnership’s business. This restriction
has been lifted in the Uniform
Limited Partnership Act of 2001.
6. Limited partnerships are considered separate
entities for most purposes.
7. Limited partnerships have been popular in
the United States mainly because of the tax
advantages they offer. Limited partners can
invest in a limited partnership without the
risk of personal liability.
8. With the increasing availability of new
forms of limited liability business organizations,
limited partnerships are losing
some of their popularity.
9. The first uniform limited partnership act
was introduced in 1916. The Revised Uniform
Limited Partnership Act (RULPA)
was introduced in 1976 and amended in
1985. A new act—the Uniform Limited
Partnership Act of 2001—was introduced
in 2001. As of late 2011, most states in the
country have adopted a version of the
RULPA with 1985 amendments. A few
have recently adopted the Uniform Limited
Partnership Act of 2001.
10. Some states have amended their statutes in
recent years to include provisions for limited
liability limited partnerships.
Partners’ Rights and Responsibilities
11. All limited partnerships must have at least
one general partner who has personal responsibility
for the debts and obligations of
the limited partnership. The rights and responsibilities
of the general partner are
generally the same as the rights and responsibilities
of a partner of a general partnership.
12. All limited partnerships must have at least
one limited partner who is not personally
liable for the debts and obligations of the
limited partnership. Limited partners have
few of the rights granted to partners in a
general partnership, and, correspondingly,
few of the responsibilities.
13. One individual may be both a limited and a
general partner. In that event, the partner
will have the rights and responsibilities of a
general partner, but that partner’s contribution
as a limited partner will be protected as
that of a limited partner.
14. The interest of a limited partner is considered
personal property, even if the partnership
assets include land.
15. Under the RULPA, limited partners have
no right to participate in the management
of the partnership business. Limited partners
who do take part in the control of the
partnership may lose their limited liability
status. Under the RULPA, the following
actions do not necessarily indicate that the
limited partner is taking part in control:
• Being a contractor for or an agent or
employee of the limited partnership or
of a general partner; or being an officer,
director, or shareholder of a general
partner that is a corporation
• Consulting with and advising a general
partner with respect to the business of
the limited partnership
• Acting as a surety for the limited partnership
or guaranteeing or assuming
one or more specific obligations of the
limited partnership
• Taking any action required or permitted
by law to bring or pursue a derivative
action in the right of the limited partnership
• Requesting or attending a meeting of
partners
• Winding up the limited partnership
• Exercising any right or power permitted
to limited partners under the RULPA
and not specifically enumerated in
this subsection
16. Although limited partners have no right
to exert control over the limited partnership,
they are entitled to vote on certain
extraordinary actions taken by the limited
partnership.
17. The Uniform Limited Partnership Act of
2001 differs substantially from the RULPA
where limited partnership participation in
management is concerned. Under the Uniform
Limited Partnership Act of 2001, limited
partners are not personally liable for
obligations of the limited partnership “even
if the limited partner participates in the
management and control of the limited
partnership.”
18. Because limited partners rely on general
partners to manage the limited partnership,
general partners owe a fiduciary duty to
limited partners.
Advantages of Doing Business as a Limited
Partnership
19. Some of the advantages of doing business
as a limited partnership compared to other
types of business organizations are as follows:
• The limited liability available for limited
partners gives limited partnerships
an advantage over other partnerships
and sole proprietorships.
• The flow-through income taxation of
limited partnerships is beneficial to
most business owners.
• Compared to interests in general partnerships,
the interest of limited partners
can be more freely transferred.
• Limited partnerships offer more business
continuity than either general
partnerships or sole proprietorships.
• Compared to sole proprietorships and
general partnerships, it may be easier to
raise capital for limited partnerships
because there must be more than one
initial investor, and subsequent investors
may be sold limited partner interests.
Disadvantages of Doing Business as a Limited
Partnership
20. There are also several disadvantages to doing
business as a limited partnership
compared to other forms of business organization,
including the following:
• Because in most states limited partners
may not participate in the management
of the limited partnership, limited partnerships
do not enjoy the same flexibility
of management as other forms of
business organizations.
• Unlike the general partnership, the limited
partnership must be formed by filing
the appropriate documentation with
the secretary of state or other designated
state authority.
• Legal and organizational expenses for
forming and operating a limited partnership
may be significant.
Organization and Management of a Limited
Partnership
21. The limited partnership certificate is the
document filed with the secretary of state
or other appropriate state authority to form
the limited partnership.
22. The limited partnership certificate usually
includes the minimum information required
by statute, with more detailed information
included in the limited partnership agreement.
Under the RULPA, the following information
must be included in the limited
partnership certificate:
• The name of the partnership
• The office address and the name and
address of the agent for service of process
• The name and business address of each
general partner
• The latest date upon which the limited
partnership is to dissolve
23. Under the Uniform Limited Partnership
Act of 2001, the following information
must be included in the limited partnership
certificate:
• The name of the limited partnership
• The street and mailing address of the
initial designated office and the name
and the street and mailing address of
the initial agent for service of process
• The name and the street and mailing
address of each general partner
• Whether the limited partnership is a
limited liability partnership
• Any additional information required by
Article 11 (This article concerns conversions
and mergers.)
24. When certain information in the limited
partnership certificate changes, an amendment
to the certificate must be filed. Most
amendments to the limited partnership certificate
must be approved by all general and
limited partners.
25. The RULPA requires that the following
documents be kept at a designated partnership
office:
• Current lists of the names and addresses
of general and limited partners
• Copies of the certificate of limited partnership
and any amendments thereto
• Copies of the limited partnership’s income
tax returns and financial statements
for the three most recent years
• Copies of all effective written partnership
agreements
26. The Uniform Limited Partnership Act of
2001 requires that the following documents
must be kept at a designated partnership office:
• A current alphabetical list of the names
and address of each partner, identifying
the general partners and limited partners
• A copy of the certificate of limited
partnership and any amendments thereto
• A copy of any filed articles of conversion
or merger
• Copies of the limited partnership’s tax
returns, annual reports, and financial
statements for the three most recent
years
• Copies of the limited partnership
agreement and any amendments thereto
• Copies of any records made by the limited
partnership for the past three years
of any consent given or votes taken by
the partners pursuant to the partnership
agreement
27. The following information, if it is not set
forth in the limited partnership agreement,
must be kept in writing at the limited partnership’s
office for inspection by all
partners:
• The amount and description of the contributions
made by each partner
• Conditions under which additional contributions
must be made by the partners
• Description of the rights of partners to
receive distributions, including returns
on all or any part of the partner’s contribution
• A description of the events causing a
dissolved limited partnership to dissolve
• A record including information concerning
the transferable interest of any person
who is both a general and a limited
partner (required by the Uniform Limited
Partnership Act of 2001)
28. The limited partnership agreement encompasses
the entire agreement among the
partners. Because it is not filed for public
record, the limited partnership agreement is
typically much more detailed than the limited
partnership certificate.
29. The following topics are usually addressed
in the limited partnership agreement:
• Name of the limited partnership
• Name and address of each partner and
his or her general or limited partner
designation
• Purpose of the limited partnership
• Address of the principal place of business
of the limited partnership
• Duration of the limited partnership
• Amounts and descriptions of contributions
made by both general and limited
partners
• Description of the limited partnership
assets
• Liability of general and limited partners
to each other and to third parties
• Distribution of profits and losses to
general and limited partners
• Indemnification of partners
• Duties of general and limited partners
• Limited partners’ rights of substitution
• Limitations on the power of the partners
• General partner compensation
• Partnership expenses
• Management and control of the business
by the general partners
• Business policies of the limited partnership,
and the rights of limited partners
to review those business policies
• Accounting practices and procedures
• Changes in general or limited partners
by withdrawal, expulsion, retirement,
or death
• Sale or purchase of limited partnership
interests
• Termination of the limited partnership
• Dissolution and winding up
• Date of agreement and the signatures of
all partners
Changes in the Limited Partnership
30. New general partners are usually admitted
to the partnership only with the written
consent of all partners or by other means
set forth in the limited partnership agreement.
31. Additional limited partners may be added
in compliance with the limited partnership
agreement.
32. The death or withdrawal of a general partner
generally causes the dissolution of the
limited partnership, unless the limited partnership
agreement provides otherwise.
33. A general partner who withdraws in violation
of the limited partnership agreement
may be liable to the other partners for damages
caused by his or her withdrawal.
34. The death or withdrawal of a limited partner
generally does not cause the dissolution
of the limited partnership. Limited partners
may usually withdraw from the limited
partnership in compliance with the limited
partnership agreement.
Financial Structure of a Limited Partnership
35. Limited partners must make a contribution
to the limited partnership, and that contribution
is placed at risk.
36. The profits and losses of the limited partnership
are shared as provided in the limited
partnership certificate or limited partnership
agreement. If the formula for allocating
profits and losses is not specified in
the limited partnership certificate or limited
partnership agreement, the profits and losses
are allocated on the basis of the value of
the contributions made by the partners to
the extent they have not been returned.
37. The income of the limited partnership is
reinvested in the limited partnership or disbursed
to the partners pursuant to the limited
partnership agreement.
38. Distributions may not be made to the partners
if, after those distributions, the partnership’s
liabilities exceed the partnership’s
assets.
39. The limited partnership’s income (or loss)
is reported annually to the IRS on Form
1065 (Partnership Return). Form 1065 reports
the income allocated to each partner.
40. Partners must report and pay income tax on
their share of the limited partnership’s income,
whether or not that income was distributed
to them.
Limited Partnership Dissociation, Dissolution,
and Winding Up
41. The RULPA provides that the limited partnership
is dissolved, and its affairs must be
wound up, when one of the following
events first occurs:
• The time period specified in the certificate
expires.
• Specific events set forth in the partnership
certificate occur.
• All the partners consent in writing to
dissolve the partnership.
• An event of withdrawal of a general
partner occurs.
• A decree of judicial dissolution is entered.
42. When the limited partnership dissolves, the
limited partnership certificate must be cancelled
by filing a cancellation of certificate
of limited partnership, signed by all general
partners, with the secretary of state or other
appropriate state authority.
43. The business of the limited partnership
may be wound up by any general partner
who has not caused a wrongful dissolution.
If there is no such general partner, the limited
partnership may be wound up by any
limited partner.
44. In most states, statutes provide that the assets
of a dissolving limited partnership
must be paid out until they are exhausted in
the following order:
(1) To creditors to satisfy liabilities of the
limited partnership
(2) To partners to satisfy distributions due
them under the partnership agreement
(3) To partners as a return of their contributions
(4) To partners as a return of their partnership
interest in the same proportion in
which partners share distributions
Derivative Actions
45. Under the RULPA, limited partners have
the right to bring derivative actions in the
right of a limited partnership to recover a
judgment in its favor. Derivative actions
may be brought on behalf of the limited
partnership if the general partners with au
thority have refused to bring an action, or if
an effort to cause those general partners to
bring the action is not likely to succeed.
Family Limited Partnerships
46. Family limited partnerships are often used
for estate-planning purposes. They are typically
funded with family businesses or
other family assets.
47. Assets held in a family limited partnership
can be protected from creditors and others
to a certain extent.
The Paralegal’s Role
48. Paralegals often assist with drafting and
filing the limited partnership agreement
and with other formalities that must be followed
by limited partnerships.
Resources
49. Some of the more important resources for
paralegals who work with limited partnerships
include state statutes, legal form
books and forms found online, information
from the secretary of state or other appropriate
state agency, government taxation
offices, and online resources.

CASE BRIEFS
Commonwealth of Pennsylvania, Department of
Revenue for the Bureau of Accounts Settlement
v. McKelvey, et al., 587 A.2d 693 (PA 1991)

Purpose: This case is a straightforward example
of how the limited partner of a limited partnership
is sheltered from personal liability for the
debts and obligations of the limited partnership.
Cause of Action: Petition to strike tax lien
Facts: This is an appeal from a lower court decision
denying appellant’s petition to strike a tax
lien.
Peter Bradley (the “Appellant”) was a
limited partner of Different Spokes, a limited
partnership formed to own and operate a retail
bicycle business. Appellant provided an
$18,000.00 loan to the business. As a limited
partner, he took no part in the operation or management
of the bicycle shop.
The Department of Revenue of the
Commonwealth of Pennsylvania (“Appellee”)
was notified of Appellant’s status as a limited
partner in the business on an application for
sales, use, and hotel occupancy license that was
filed by the general partner with the Appellee.
On October 10, 1985, Appellee mailed a
Notice of Sales and Use Tax Assessment to the
business address of Different Spokes for a total
assessment of $27,974.21. No challenge was
made to the assessment nor was the assessment
paid. In April of 1986, Appellee issued liens in
the amount of $27,974.21 against the business
and its general and limited partners. Appellant,
who had not been individually notified of the
assessment by the Appellee, did not discover the
lien had been filed until he applied for a mortgage
several months later. Appellant filed a Petition
to Strike Tax Lien in the Court of Common
Pleas of Delaware County. The court determined
its jurisdiction was limited to the question
of whether or not Appellant had received notice
of the assessment. The Common Pleas Court
held that notice to the partnership constituted
notice to the Appellant, and therefore the Appellant
had received notice. His petition to strike
the tax lien was denied.
Appellant filed an appeal to the Commonwealth
Court, which affirmed, holding that
the Notice of Tax Assessment sent to the limited
partnership was “sufficient to support the lien
entered against as a limited partner.” In the case
at hand, Appellant appealed that decision.
Issue: Did Appellant receive actual notice of a
tax assessment against the business in which he
was a limited partner when such notice was sent
to the limited partnership at its business address?
As a limited partner, is Appellant liable for a
partnership debt?
Holding: The court in this case held that the
Appellant had not received notice of the tax assessment
and that he was not liable for the tax
obligation of the limited partnership. The lower
court’s decision was reversed.
Reasoning: The Pennsylvania Supreme Court
found that notice to a limited partnership can
never constitute notice to a limited partner, because,
by definition, limited partners do not take
part in the control or management of the partnership
business. Even assuming proper notice
to Appellant, under Pennsylvania law, a limited
partner is not liable for the obligations of the
limited partnership.