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.
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.
Read More: How to Convert a General to a 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.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.