Understanding the partnership structure (part 2): the limited partnership.

• Author: Swais, Nishan

In the last issue, we examined the legal structure of a general partnership. We noted that the partners in a general partnership are jointly and severally liable for the debts and obligations of the partnership. Moreover, in the case of individual partners, their personal assets could be used to satisfy those debts and obligations.

In this issue, we look at a special type of partnership arrangement known as a limited partnership. A limited partnership is special because, unlike a general partnership, a limited partnership grants limited liability to a certain class of partners. Those partners are called the limited partners. Together with the general partner (or general partners), they comprise the two classes of partners in a limited partnership.

In a limited partnership, only the general partner does not have limited liability. That means that a general partner is not only personally responsible for the debts and obligations of the limited partnership, but that recourse can be had to the general partner's personal assets for purposes of satisfying those debts and obligations.

At the same time, however, only the general partner is legally allowed to conduct the business of the limited partnership or contribute services to it. A limited partner cannot do either of these things. If a limited partner does become involved in the operation of the business or contributes his or her services to it, he or she loses the limited liability status under the law.

As you might expect, setting up a limited partnership is not as easy as setting up a general partnership.

To begin, a limited partnership -- unlike a general partnership -- does not simply arise when two or more persons carry on business with a view to profit. To set up a limited partnership, you must comply with the relevant legislation. Among other things, that means you must file the appropriate documentation with the appropriate governmental authority.

You should also enter into a written partnership agreement to provide for the rights and obligations of the various parties, especially regarding matters such as the division of the partnership profits. In the absence of an agreement, the partners' relation will be governed by legislation and the common law.

As noted, every limited partnership is made up of some combination of general and limited partners. Those partners can be individuals or corporations. A typical limited partnership arrangement involves a general partner, usually a...