The first of the entities that we will examine that do afford the business operator some protection from personal liability will be the LP. The LP is an entity which should never be confused with its partial namesake the Limited Liability Partnership (LLP). The LP and the LLP are two separate and distinct business formats and as we will see they are very different from each other.

By definition an LP has a degree of similarity to the General Partnership in that it too is an association of two or more individuals who engage in business activity with the intent of sharing profits and losses. The LP is essentially a format that is bridge between formats such as the Limited Liability Company (LLC), the LLP and the business stock corporation, where generally there is no personal liability at all.

An LP partnership is formed with a General Partner who is at personal risk for the activities of the LP. In addition the assets of the LP are at risk as are the personal assets of the General Partner. Most often the LP will agree to indemnify its General Partner any personal liability that might be incurred. Otherwise no one would ever take the position.

The Limited Partner in the LP in contrast to the General Partner by definition enjoys limited liability within the LP in that the Limited Partner's personal liability within the LP is limited to the extent of that individual's contribution to the LP itself.

In a LP the General Partner is responsible for the day to day business activities of the LP. A Limited Partner is not permitted to engage in the daily business activities of the LP. A Limited Partner who engages in the daily business activities of the LP will be considered under the law to be a General Partner. As such the Limited Partner will lose the protection from liability that the law offers such a person.

The monetary incentive for investing in an LP and in becoming a Limited Partner is that generally a limited partnership interest in an LP is freely transferable. The LP business format has become much less common as other more attractive types of business formats have become available, which provide better tax benefits than an LP. Nevertheless the LP is often used as a business format for areas such as real estate ownership. In this type of LP if the real estate is owned is commercial real property or a multi-residential apartment building and the real property operates at a profit, the Limited Partner may be able to sell/transfer the limited partnership for a substantial profit to another investor. If however the LP does not earn a profit and indeed begins to lose money, the extent to which the limited partner will incur any personal liability for the LP's losses will be limited to the extent of the Limited Partner's investment in the LP.

An LP begins its business life with the filing of a Certificate of Limited Partnership. In New York the filing authority for this is the New York Secretary of State. Subsequent to the filing the General Partner and the Limited Partners will execute a Limited Partnership Agreement which governs the terms under which the LP will operate. The Certificate of Limited Partnership will name the General Partner as well as the name of all of the Limited Partners. When Limited Partners come and go an amended certificate must be filed.

Management and Control of the Limited Partnership

The General Partner's responsibilities in operating the LP are identical to those of a General Partner in an ordinary General Partnership. The primary duty of the General Partner to the LP is one of absolute loyalty to the LP.

A General Partner in the exercise of the duties of the General Partner may not without the consent of the Limited Partners;

1) Act outside of the authority granted to the General Partner in the Limited Partnership Agreement.

2) Interfere with the operation of the LP.

3) Possess or use LP property for personal rather than business purposes.

A Limited Partner as was stated earlier may not be actively involved in the operation of the LP without losing the advantage of limited liability. Nevertheless the law does allow for some involvement by a Limited Partner in the LP's affairs without losing this benefit.

1) A Limited Partner may be a contractor for an LP.

2) A Limited Partner may be consulted to advise the General Partner on LP affairs.

3) A Limited Partner may attend an LP meeting.

4) A Limited Partner may propose the dissolution of a Limited Partnership.

An LP agreement may provide specific instructions for the liquidation of the LP. Generally a Limited Partner cannot be actively involved in the liquidation of the LP. This function in limited to the General Partner. The distribution of the LP's assets are set forth below.

When an LP terminates the assets of the LP's are distributed as follows.

1)Wage earners or employees of the LP must be compensated.

2) Taxes that are due and owing to the Federal and state governments then must be paid.

3) Outside creditors of the LP are then compensated. First the secured creditors and then the unsecured creditors.

4) Each of the Limited Partners' share of the profits will be distributed.

5) Each of the Limited Partners' capital contribution (original investment) will be returned.

6) The General Partner's profits are then paid.

7) Any capital contributions made by the General Partner will be returned.

Question:

Indicate why you would or would not want to be involved in a Limited Partnership investment.