|
Delaware Limited Partnerships
Since the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. 17-101, et seq. (the "Act") was enacted in January 1983, Delaware has increasingly become a forum of choice for the organization of limited partnerships. The Act has been amended periodically since its enactment to keep it responsive to the needs of the business community.
The advantages of a Delaware limited partnership include the tax advantages that a limited partnership possesses under federal and State of Delaware income tax law (i.e., avoidance of taxation at the entity level), the freedom of contract principles of Delaware's business statutes, the ease of forming a limited partnership under the Act and the protections contained in the Act relating to the liability of limited partners.
Formation. A limited partnership is formed by two or more persons or entities, with at least one general partner and one or more limited partners. The Act permits a limited partnership to conduct any lawful business that a Delaware general partnership may carry on with the exception of insurance and banking.
It is relatively easy to form a limited partnership under the Act. A limited partnership is formed by the filing of a Certificate of Limited Partnership with the Secretary of State of the State of Delaware. The required contents of a Certificate of Limited Partnership are few-- the name of the limited partnership (which must include "Limited Partnership" or"L.P."), the name and address of the registered agent of the limited partnership in Delaware for service of process, and the name and address of each general partner of the limited partnership. Although the original Certificate of Limited Partnership must be signed by all of the general partners, the limited partners need not be listed, and need not sign the certificate.
While the certificate of limited partnership is the formal document filed with the Secretary of State, the basic agreement between the general and limited partners are typically detailed in a partnership agreement. Although Delaware law permits the Partnership Agreement to be oral, this is not generally advisable. The partnership agreement typically contains provisions addressing the admission of partners, the rights and powers of partners, indemnification rights, allocation of profits and losses among the partners, the business to be conducted by the limited partnership, and dissolution and winding up of the partnership. The partnership agreement does not get filed with the Delaware Secretary of State.
Limited Liability. In a general partnership, all partners are jointly liable for the obligations of The partnership and for the wrongful acts of co-partners committed in the course of the partnership business. In a limited partnership, the general partners have that same liability, but the limited partners who do not participate in the control of the business of The partnership generally have no risk beyond their investment in the limited partnership and are not generally liable for the debts and obligations of the limited partnership. The Act is substantially more favorable than in the scope of rights that a limited partner may have that will not jeopardize limited liability.
Management. Typically, the general partners of a limited partnership conduct the day-to-day business and affairs of the limited partnership and are involved in the management of the limited partnership's business. A limited partner is generally a partner of the limited partnership who does not participate in the control of the business, but who invests in the Limited Partnership in exchange for certain economic rights,including the right to share in the profits of the business venture. However, it is not uncommon for The partnership agreement to provide that the general partners' authority with respect to specific types of actions is limited. In this regard, it is frequently the case that the general partners must obtain limited partner consent before committing the partnership to certain courses of action. For example, the partnership agreement may provide that limited partner consent is necessary in order for the general partners to sell partnership property or take on additional indebtedness. Rights such as these permit the limited partners to be actively involved in monitoring their investment in the limited partnership without becoming liable as general partners of the limited partnership.
The Act provides that to the extent that a partner has duties (including fiduciary duties) to The partnership or another partner, any such partner acting under the partnership agreement will not be liable to The partnership or another partner for the partner's good faith reliance on the partnership agreement. The partnership's agreement may itself expand or restrict a partner's duties. These are two features of the Act that set it apart from other limited partnership statutes.
Merger and Dissolution. The Act provides that limited partnerships may merge with another limited partnership, whether U.S. or non-U.S., a domestic or foreign corporation, a domestic or foreign business trust or certain other types of business organizations. Unless otherwise provided in the partnership agreement merger requires the consent of all general partners and a majority of the limited partners (or in some cases a majority in economic interest of the limited partners).
Dissolution of the limited partnership will occur at the time specified in the partnership agreement, or on written consent of all partners, or on withdrawal of the last general partner without timely appointment of a successor. The limited partnership may also be dissolved on order of a court if it is no longer practicable to carry on the limited partnership's business.
Taxation. Limited partnerships are pass-through entities for tax purposes. This means that the various items of income, gain, credit, deduction and loss of the partnership are passed through to the partners in accordance with the provisions of The partnership agreement. Under certain circumstances, those were either so-called "substantial economic effect" or "alternate economic effect" are not found to exist under Section 704 of the Internal Revenue Code of 1986, as amended, the allocation of tax items to partners may not be respected for Federal (and, therefore, State of Delaware) income tax purposes. Such a circumstance would not, however, result in an entity-level tax, but rather a re-allocation of tax items to partners in a manner that properly reflects the rules of Section 704 of the Internal Revenue Code of 1986, as amended. | 
