Can a Limited Partner Make Decisions Binding to the Partnership?

By John Cromwell

A limited partner can have an ownership stake in a limited partnership or a limited liability partnership. Whether a limited partner can make a binding decision for a business depends on the organization he is affiliated with and what the decision is. Both limited partnerships and limited liability partnerships are bound by state law. As a result you may want to review the relevant statutes of your state to determine what rights a limited partner has.

Partnership Agreement

A partnership agreement is an accord made between the owners at the start of the business. Both LLPs and LPs use these documents. These agreements are used to define the scope of the business, the partners’ responsibilities, how decisions will be made, and the rights of the partners. It can also be used to identify who the limited partners will be. During the negotiation and execution of the agreement, the limited partners can make decisions about the agreement that will ultimately bind the partnership.

Limited Liability Partnership

In an LLP, every owner is a limited partner and they are not prohibited from making decisions. Each limited partner is not legally liable for any other partners’ actions. However, each partner is personally liable for any actions he takes in relationship to the business and for the partnership’s financial debts. So if Mark and Jessica enter into an LLP and Mark commits professional malpractice, Jessica is not personally liable for that malpractice as Mark’s partner. However, if the LLP buys office supplies on credit, Mark and Jessica are equally liable.

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Limited Partnership

An LP is composed of two classes of partners. The general partners are the individuals who manage the partnership and are responsible for the day-to-day activities. The general partners are personally liable for all of the partnership’s debts and legal obligations. The limited partners are not personally liable for any of the partnership’s financial or legal responsibilities, but they cannot participate in the management of the business. The limited partners are also unable to withdraw any financial investment they made in the business without the general partners’ approval. Both the general and limited partners do get shares of the business’s profits. Limited partners are generally entities that want to act as “silent partners” in the business.

Loss of Liability Protection

If a person declares himself a limited partner in an LP but a court determines that he managed the business in any way, he becomes liable for the business’s debts and obligations just like a general partner. A limited partner should not participate in the day-to-day activities of the business to avoid the appearance of managing the business.

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Comparison: LP and LLP

References

Related articles

How to Convert a General to a Limited Partnership

A general partnership is a contractual agreement between two or more people or entities to conduct business together. Since each partner in a general partnership remains personally liable for all business obligations, the law does not require it to file a formation document that notifies the public of its status as an independent entity. A limited partnership allows some of the partners to enjoy limited liability, meaning their personal responsibility for business debts is limited to the amount of their investment. States that allow the formation of limited partnerships require them to register with the state by filing a certificate of limited partnership, so the public can identify the parties legally responsible for business activity.

Partnership Profit-Sharing Agreements

When two or more people decide to start a business for a profit, the resulting agreement is called a partnership, governed by state law as well as individual contracts. Following the creation of the business, the execution of a profit-sharing agreement is an important step in properly allocating profits and losses between partners and determining individual tax liabilities. If prepared properly, this written document will represent the true intentions of the partners. It does not necessarily need to be based on ownership percentages.

Michigan Business Partnership Laws

Michigan has adopted the Uniform Partnership Act and Revised Uniform Limited Partnership Act, located in Chapter 449 of Michigan Codified Law along with several other partnership act provisions. This Act addresses a wide range of partnership issues, such as the types of partnerships available in Michigan, establishment of a partnership, winding up a partnership, and the rights of partners. Attorneys, online document preparation websites, and Michigan’s Bureau of Commercial Services offer assistance for persons wanting to establish partnerships under Michigan law.

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