The limited partnership (“LP”) is not the most commonly-used business entity in Delaware.
It is used less frequently since the adoption of the limited liability company (LLC) in in 1993; however, the Delaware LP did account for almost 2.06 percent of all business formations we formed in Delaware in 2016.
Like the LLC, the limited partnership is a creation of contract, meaning that it is flexible and subject to few requirements or terms fixed by Delaware law.
A limited partnership is formed by filing a Certificate of Limited Partnership with the state of Delaware. A limited partnership is not required to file its governing document, the limited partnership agreement, with the state of Delaware.
This limited partnership agreement can provide for a wide range of voting rights, economic provisions and other terms crafted to reflect the specific relationship negotiated by the limited partnership's general partner(s) and limited partners. The limited partnership form is flexible and can be tailored to fit a business's needs and the terms agreed upon with and among the partnerships founders and investors.
A limited partnership is managed by one or more general partners, and must have at least one general partner. A general partner can delegate management authority and responsibility for operations to others (except for limited partners as discussed below).
A general partner is personally liable for the debts and obligations of the limited partners, meaning it creditors or persons seeking to sue the partnership may directly pursue the assets of the general partner in satisfaction of judgements against or debts incurred by the partnership.
The limited partnership agreement may contain a provision stating that the partnership will cover any costs, expenses or losses incurred by the general partner, but this only benefits a general partner to the extent the partnership has sufficient assets to provide that indemnification.
This broad personal liability of general partners is one of the reasons limited liability companies are often viewed as more advantageous, since managing members in an LLC receive the same liability protection as those members that are not involved in management.
Limited partners generally are not liable for the debts and obligations of the partnership, meaning they risk only the amount of their investment. Limited partners are not permitted to take part in the management of a limited partnership, although this would not include voting on matters typically within the purview of equity holders pursuant to the terms of the limited partnership agreement.
The prohibition on participating in management generally envisions participation in the day to day activities of the partnership's operations, or acting in such a way that a third party dealing with the limited partner would believe he or she was a general partner controlling the partnership and authorized to act on its behalf.
If a limited partner is deemed have participated in management, the limited partner could be treated as a general partner for liability purposes.
Unless a limited partnership elects to be taxed as a corporation, a limited partnership is taxed as a flow-through entity, meaning that the limited partnership itself does not pay tax.
Instead, the limited partnership allocates to each member its allocable share of items of income, gain, loss, deduction and credit. Like the LLC, the state of Delaware does charge a Franchise Tax for the right or privilege of owning a Delaware entity. The tax is a flat fee of $300 regardless of how much or how little business is done with the LP.
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.