How Limited Partnerships Work
I hope you´re all recovering nicely from Thanksgiving dinner. I ate too much and didn´t get to all the chores I was supposed to do over the weekend, but my husband tells me that if two turkeys can be pardoned, so can I.
Our next-door neighbors are already putting up their Christmas lights, and we´ve already received several invitations to holiday parties. But alas! Business as usual tomorrow. To get myself into a back-to-the-office frame of mind, I´m going to dive right into a topic that causes more than its share of confusion — limited partnerships.
How Limited Partnerships Work
A limited partnership must have at least 1 general partner and 1 or more limited partners.
General Partner: The general partner is liable for all partnership liabilities. Therefore, the general partner is commonly an entity whose shareholders or members enjoy limited liability, such as a corporation or limited liability company ("LLC"). Some or all of the owners of the general partner may be the same as the limited partners of the limited partnership, or the ownership of the general partner may be completely different from that of the limited partnership.
Limited Partners: The limited partners have limited liability — that is, unless they voluntarily guarantee limited partnership debts, limited partners are risking only the amount they invest in the limited partnership.
Here´s an example:
Four individuals, Ashley, Briana, Carlos, and David form a limited partnership to invest in real estate. First, Ashley and Briana form Briash Management LLC. Then, the four individuals, plus the LLC, form Abricada Properties LP, a limited partnership. Ashley, Briana, Carlos, and David are each a limited partner owning 24.5% of the partnership. Briash Management LLC is the general partner, with holdings of 2% of the partnership. (Carlos and David would probably want to insist on including a provision in the partnership agreement requiring approval of partners owning at least 73.5% of the partnership for important partnership decisions; otherwise, Ashley and Briana will be in control. Together, Ashely and Briana own 51% of the partnership, 49% directly, and 2% indirectly, through Briash LLC).
Everything goes well for the limited partnership for ten months, but in the eleventh month, a tenant in one of the partnership properties is severely injured by a fire that started because of faulty electrical wiring. The tenant sues the partnership and is awarded $600,000. All the partnership´s real estate is available to satisfy the tenant´s judgment, as well as the cash in Briash LLC´s bank account. But the tenant cannot reach the assets owned by Ashley, Briana, Carlos, and David individually.
Next time: some very important operating requirements for limited partnerships
