A limited partnership agreement is the main document that, once completed, is legally binding since it sets out all the thorough and lawfully necessary provisions that need to exist between the investors and the general partners. The partners to the agreement are free to opt for whatever commercial terms they want, with the only exception being that a limited partner cannot partake in the management of the company, and if he does, then the terms of the limited partnership agreement will be violated, resulting in loss of limited liability status.
Though the limited partnership agreement is very like a general partnership agreement it differs in one important aspect – it consists of one or more limited partners. Limited partners have limited liability – they are not allowed any managerial authority and their liability is limited to the extent of their registered investment. Limited partners also do not have agency rights and so cannot bind the company unless they are specifically authorized to act as agents thus creating an agency by virtue of estoppels or by acts ratified by the company, conferring agency authority on the limited partners.
In the United States, limited partnership agreements are most often found in the film industry, in single project businesses and in labor capital partnerships. This is because the limited liability status is the main focus of the business agreement. In addition, limited liability is also most often used when the business partners wish to give shares to individuals without incurring any additional tax liabilities for the business.
The limited partnership agreement states all the rights and obligations of the partners and endeavors to cover all salient points of the construction, functioning as well as termination of the partnership. The limited partnership agreement will specify its investment policies, sharing of profits as well as fees and expenditures of the company. It shall also state the constitution and administrative concerns of the business such as when can managers launch a new fund, how reports and accounting shall be carried out and how information shall be provided.
In general, a limited partnership agreement shall have investors who will fund the agreement by making small contributions to the capital as well as by lending specific amounts that can be called in tranches. In addition, they may specify in which companies to invest the money. Loans given by limited partners shall have priority in being repaid and the remaining profit shall be distributed to the investors and managers. Limited partnerships usually have investors funding the business through capital contributions as well as through loans extended to the limited partnership. The limited partnership agreement will specifically allow that no amount in excess of the investor’s total pledge shall be called for by the partnership. Furthermore, once the invested amounts made by partners have been realized, the proceeds so realized may be used to offset expenditures incurred by the partnership.
There are also clauses in the partnership that deal with how the partner’s loans will be repaid, how profits are distributed to limited as well as to general partners, how profits are allocated and in what ratio will the profits be shared among partners. To terminate the limited partnership agreement, the agreement shall specify which events, should they occur, will result in termination of the agreement. These may include economic failure, financial collapse, dissolution or by expelling the general partner. In addition, the limited partnership agreement may also state events that do not constitute termination of the agreement. Limited partnership agreements, once formed, are difficult to alter unless the terms and conditions for altering the agreement have been complied with.
Since the limited partnership agreement is quite an exhaustive document, it may be more advisable to purchase predefined documents from vendors for as little as ten dollars rather than incur additional expenses and hassles in defining one from scratch. Being complete in all respects, these predefined documents relating to limited partnership agreements, will easily and readily serve the purpose for users, who need only simply type in all necessary information into such documents rather than use a lawyer and additional staff in forming one for themselves.
Wade Anderson is a CPA and operates DigitalWorkTools.com
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