FORMATION OF A LIMITED PARTNERSHIP (LP)- FORM A LP - LIMITED PARTNERSHIP
Definition and General Overview of a Limited Partnership – LP – Ltd.
A Texas limited partnership consists of one or more general partners and one or more limited partners. The general partner or general partners will have control of the day to day operational and control of the limited partnership and any other matters allowed the general partner as set forth in the Limited Partnership Agreement. Although the limited partnership agreement is not filed for public record, the limited partnership must file a certificate of formation with the Texas Secretary of State. Pursuant to Section 402.001 of the Texas Business Organizations Code (TBOC), the TBOC governs the formation of all new domestic limited partnerships as of January 1, 2006.
A Texas limited partnership is an entity formally created under Texas law where the limited partners can receive liability protection. The limited partners can only receive liability protection by filing a Certificate of Formation of Limited Partnership with the State of Texas pursuant to Section 3.001 of the TBOC. It is recommended that all limited partnerships have a limited partnership agreement. Limited partnership agreements are drafted to clearly define the rights and responsibilities of the general partner in addition to the matters upon which the limited partners will have control or a vote regarding the operations of the limited partnership. Active management of the limited partnership is the responsibility of the general partner and limited partners should not participate in active management of the partnership. A general partner in a limited partnership has the same liability as a partner in the ordinary partnership but a limited partner, as the term indicates, may not be liable to third parties beyond the amount of his or her stake in the limited partnership unless he or she exercises substantially the same powers as those of a general partner by participating in the management and control of the partnership. This makes the purchase of a limited partnership attractive for an individual looking to invest in a business without either participating actively in management or risking liability beyond the initial investment. However, a limited partner but can be employed by the partnership. In consideration of the non-participatory financial capitalization of the limited partners the general partner accepts liability and responsibility for the partnership. As a general rule, it is advisable that the general partner be a corporation, limited liability company (LLC), or another limited partnership because the general partner is ultimately liable for all the debts and obligations of the limited partnership. Limited partners invest in the limited partnership without risk of liability beyond their initial contribution as set forth in the limited partnership agreement.
(1) the limited partner is also a general partner; or
(2) in addition to the exercise of the limited partner's rights and powers as a limited partner, the limited partner participates in the control of the business.
(b) If the limited partner participates in the control of the business, the limited partner is liable only to a person who transacts business with the limited partnership reasonably believing, based on the limited partner's conduct, that the limited partner is a general partner.
Therefore, in a Texas limited partnership there is a defined and clear severance of the ownership of the limited partnership from the management participation. The limited partner is excluded from control of the business as the price of avoiding liability as a general partner, and the general partner is responsible for all business operations.
Limited Partnership Agreements - Overview
TBOC Section 3.011 states that to form a limited partnership, the partners must enter into a partnership agreement and file a certificate of formation. Formation of a limited partnership occurs at the time a certificate of formation if filed with the Texas Secretary of State. The partnership agreement must be kept as a part of the required records of the limited partnership in accordance with TBOC 153.551 (a)(2)(B).
A basic limited partnership agreement would contain many of the following provisions based upon the agreements of the partners such as the Rights and Obligations of Limited Partners including 1) a list of non-management activities, 2) obligations to contribute, 3) classes of partners and voting rights, 4) return of prohibited distributions, 5) approval of interested transactions, 6) assignment of interest, and 7) withdrawal from partnership. The limited partnership agreement would also contain upon agreement of the partners language regarding the Rights and Obligations of General Partners including s 1) compensation for management duties, if any, 2) events of withdrawal, and 3) provisions regarding assignment of interest, as well as the Rights and Obligations of Assignee and provisions concerning the Termination of the Partnership. Contact Thomas P. Finley to discuss drafting Limited Partnership Agreements.
Limited Partnerships - General questions, overview checklist when forming a LP:
1. What is the proposed name for the limited partnership LP? It is best to provide your preferred name and two alternatives. The name of a limited partnership LP that will register as a limited liability partnership must also contain “limited liability partnership”, or an abbreviation such as “LP”, “Ltd.”
2. Who will be the Registered Agent for the limited partnership and what will be the registered office street address for the limited partnership? A Registered Agent must consent to serve as registered agent for the limited partnership.
3. What will be the principal place of business of the limited partnership after formation?
4. What is/are the Name(s) and address(es) of the general partner(s)? Often times I assist clients in the formation of the general partner at the same time as the formation of the limited partnership. If the general partner will be a corporation or LLC to also be formed, see the checklist to form a corporation or the checklist to form a limited liability company (LLC).
The above is a general overview of the items needed when forming a limited partnership LP. Contact me to discuss the general questions and checklist above to form a limited partnership LP and schedule an office appointment.
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