Limited Partnership - Limited Liability

Limited Liability

Like shareholders in a corporation, LPs have limited liability, meaning they are only liable on debts incurred by the firm to the extent of their registered investment and have no management authority. The GPs pay the LPs a return on their investment (similar to a dividend), the nature and extent of which is usually defined in the partnership agreement. General Partners thus carry more liability, and in cases of financial loss, the GPs will be liable.

LP members are subject to the same alter ego piercing theories as corporate shareholders. However, it is more difficult to pierce the LP veil because LPs do not have a great many formalities to maintain. So long as the LP and the members do not commingle funds, it would be difficult to pierce its veil.

Membership interests in LPs and partnership interests are afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor’s share of distributions, without conferring on the creditor any voting or management rights.

When the partnership is being constituted or the composition of the firm is changing, LPs are generally required to file documents with the relevant state registration office. LPs must also explicitly disclose their LP status when dealing with other parties, so that such parties are on notice that the individual negotiating with them carries limited liability. It is customary that the notepaper, other documentation, and electronic materials issued to the public by the firm will carry a clear statement identifying the legal nature of the firm and listing the partners separately as general and limited. Hence, unlike the GPs, the LPs do not have inherent agency authority to bind the firm unless they are subsequently held out as agents and so create an agency by estoppel or acts of ratification by the firm create ostensible authority.

Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability. In some jurisdictions, the limited liability of the LPs is contingent on their not participating in management.