Limited Partnerships - Who Has Liability?

Auguest 6, 2004
By Richard Smith, LLB

The limited liability factor of limited partnerships (LPs) is probably the number one reason why people considering a partnership relation will chose this format over that of a general partnership. This is not to say, however, that all partners in the LP will have limited status.

The reason why this is so is because most states that permit LPs state that an LP must consist of, at minimum, both a limited partner and a general partner. As a general partner is required to have unlimited personal liability for all of the debts and obligations of the partnership, determining whom the general partner in the LP is becomes very important indeed.

Basically, the person who is responsible for the day-to-day management of the partnership is the person considered the general partner of the partnership. All other partners are entitled to claim limited liability; apart from some very specific circumstance, such as in the case of direct partner liability - where a partner is deemed to have acted negligently and/or with malfeasance. With limited liability comes the right to only be liable for the contribution the partner has made, or has agreed to make under a partnership agreement.

Limited Partnerships - Making Someone Else The Manager
Unfortunately the partnership of an LP cannot avoid the general partner rule by appointing someone who is not a partner of the partnership the manager of the partnership. Nor can they avoid this liability by appointing a limited partner as managing partner.

The reason for this is that state partnership laws prescribe that in exchange for being given limited liability, a partner with limited liability status is not allowed to become involved in the day-to-day affairs of the partnership.

In effect what this means is that the limited partner has a relationship with the partnership similar to that of a shareholder with a limited company - they may vote on certain issue, but they cannot run the company (that job is left up to the directors).

Similarly, state partnership laws state there where a person holds themselves out as being in charge of the day-to-day management of the partnership, that person agrees to be treated as the general partner of the partnership, regardless of whether or not the person is in fact a partner of the LP.

What this means is that you need to consider who is going to run the day-to-day business of your LP very carefully as that person is going to have to agree to have unlimited liability for the debts and obligations of the partnership!