How to Use Limited Liability Companies & Limited Partnerships. Garrett Sutton
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to use a corporate general partner to manage the Limited Partnership. The corporate titles (president, etc.) flow from the corporate general partner, who has traditional corporate authority to conduct the Limited Partnership’s business.
Who has the authority to bind the LLC/LP?
LLC: In a member-managed LLC, each member has the authority to sign contracts that bind the LLC. In a manager-managed LLC, unless other members have been authorized, only the managers may bind the LLC.
LP: Only general partners may bind the LP.
Must LLCs/LPs maintain company records?
The general rule for most states (and a good idea anyway) is that each entity must keep the following records and, upon reasonable notice, make them available to members/limited partners.
1. All entity documents (Operating or Partnership Agreement, minutes of meetings).
2. A current list of members/partners with their addresses.
3. Voting right information.
4. All tax filings (federal, state and local).
5. Financial information including that information found on a balance sheet.
Are limiteds/members entitled to view company records?
Yes, limiteds/members are entitled to view company records. Most states provide that certain company documentation and financial information may be reviewed upon reasonable notice. Colorado and Illinois, for example, have statutes preventing unreasonable restrictions on a member’s right of access to books and records.
What is the fiduciary duty of care owed by a general partner/manager?
Fiduciary duty means the legal duty of general partners and managers to make business decisions, spend the entity’s money and act in what they reasonably believe to be the best interests of their business. A fiduciary has a duty to act in good faith and with the utmost of care. General partners and managers, respectively, have a fiduciary duty to their limiteds and members.
What can occur if the general partner/manager breaches his or her fiduciary duty?
The limited partners/members may obtain damages from the general partner/manager if he or she breaches his or her fiduciary duty. In addition, if a majority consent was not obtained, a general partner/manager may be required to return any profits or benefits received from taking an opportunity that was the company’s to pursue.
Who can act as a manager/general partner?
LLC: Most states allow any person (United States or foreign national), corporation, partnership and trust, or separate LLC to serve as manager. But check your state rules, which may be subject to change. Colorado requires a natural person, 18 years or older. Minnesota requires an 18 year old or older individual, disallowing corporations and the like.
LP: Again, most states allow individuals, Corporations, LLCs and Trusts to serve as general partners. Be sure to check your state’s statute for any variance to this general rule.
Must a general partner/manager be a partner/member?
LLC: If an LLC is member-managed, by definition, the managers must be members. In a manager-managed scenario, however, a manager does not have to be a member. As previously discussed, in some LLCs the members will bring in a professional (nonmember) manager to run the business.
LP: As a general rule, a general partner should be a partner and have a partnership interest in the Limited Partnership. While certain creative arrangements can be made whereby a general partner has a lesser form of partnership interest, be sure to consult with your professional advisor on how (and why) to craft such a strategy.
Who elects the initial general partner(s)/manager(s)?
The initial general partner(s)/manager(s) must be named in the certificate of Limited Partnership/Articles of Organization filed with the state. So they must be agreed upon and appointed by the founding partners/members at the very first meeting.
Must the general partner(s)/manager(s) be residents of the state of entity formation?
No, unless such requirement is set forth in the Partnership Agreement or the Operating Agreement, general partner(s)/manager(s) need not be residents of the state of entity formation.
Does an LP/LLC have to hold regular meetings for its limited partners/members?
Though not necessary, as a practical matter and as discussed throughout the book, the better practice is to hold an annual meeting.
Are general partner(s)/manager(s) required to be elected on an annual basis?
LLC: Most states allow the members to set up their own procedures for the election of managers, which may be annual or otherwise. A few states, unless agreed to the contrary by the members, require the annual election of managers.
LP: No, unless so required in the Partnership Agreement, general partner(s) need not be elected on an annual basis.
Can the limited partner(s)/member(s) remove a general partner/manager with or without cause?
LLC: Again, it depends on what is provided in the Operating Agreement. If the Operating Agreement is silent on the issue, the default rules of each state’s statute apply. These rules differ from state to state. The better practice, once again, is to draft exactly the procedure you want into the Agreement.
LP: It depends on what is provided for in the Partnership Agreement. If the agreement is so drafted, removal with or without cause can be accomplished. If the agreement is silent, state law will apply, and on this issue, each state’s law is different. The better practice is to draft the agreement with the procedure you want in place.
Can a manager/general partner be indemnified and held harmless for claims that may arise?
Yes, with both entities, indemnification is an option, whereby if a management person is sued the entity will cover their legal defense costs and pay any claims that arise. But check whether your state statute limits the extent of any indemnification.
When can a limited partner become liable as a general partner?
When a limited becomes actively involved in the business and its management, liability may attach. Nevada’s law on this issue is well drafted and protects the limiteds as best as possible. It states:
“1. Except as provided in subsection 4, a limited partner is not liable for the obligations of a limited partnership unless he is also a general partner or, in addition to the exercise of his rights and powers as a limited partner, he participates in the control of the business. However, if the limited partner participates in the control of the business, he is liable only to persons who transact business with the limited partnership reasonably believing, based upon the limited partner’s conduct, that he is a general partner.”
For more on this statute see NRS 88.430.
Nevertheless, where a limited partner acts as a general he or she may be personally liable to creditors. If a limited negotiates contracts or represents the LP in an official capacity they may be seen as acting as a general partner. The key to avoiding such a fate is to not tempt it. If you are a limited partner, do not act as a general partner.
What LP/LLC decisions require unanimous agreement?
As previously mentioned, approval of the Limited Partnership/Operating Agreement requires unanimous consent in many states. The better practice is to have each partner/member sign the agreement, thereby agreeing to be bound by its terms. Some states require that amending the agreements also require a unanimous vote. Again, it is good practice to have each partner/member sign any amended agreement. Other decisions, by prior agreement, may be required to have a unanimous vote.
Is there any set standard for how much should or can be paid in management fees to a general partner/manager?
There is no set standard for management compensation. Please note that the federal government wants to see a reasonable salary being paid whenever possible so that payroll taxes may be assessed in order to forestall