Limited Partner As Officer Of General Partner?
Does the limited partner lose their limited liability or exemption from self-employment tax by so acting (in either NV or CA, if it matters)?[ Edited by 4e6zbi102 on Date 04/30/2004 ]
From my understanding of the rules of a limited partnership, the reason limited partners have limited liability is because essentially they are just infusing capital into the partnership. The general manager has the duties of actually running the business of the partnership and also why the general partner has full liability.
If a limited partner starts working as an officer of the general partner and performing work that relates back to the business of the partnership, then I would imagine they would no longer be considered a limited partner and would lose the liability protection.
(But I could be wrong)
I've heard it suggested that a limited partner isn't acting as a general partner when acting as an officer of the general partner, because the limited partner is not representing themselves as a general partner of the partnership. Therefore, they don't lose limited liability. I haven't been able to confirm it, though.
Assuming the GP is a corporation then it is possible to wear both hats and still be sheltered from liability. I've done it, had two attnys who were also on the board of Directors of the Corp. G.P. and while one of them would have signed anything the other was afraid of his own shadow and fretted constantly about keeping minute books straight, etc. less he have any personal liability
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On 2004-05-12 08:19, commercialking wrote:
Assuming the GP is a corporation then it is possible to wear both hats and still be sheltered from liability. I've done it, had two attnys who were also on the board of Directors of the Corp.
So you had an attorney bless the idea? What must you do, or not do, in order to keep things kosher i.e. keep a plaintiff's attorney from claiming that by acting as officer of the corporate GP you forfeit limited liability as limited partner. Does IL law specifically permit this, as TX law does, or are you relying on common law and standard judicial practice?
Ok so I'm trying to figure out how to answer this without it becoming a full-blown course in structuring Limited Partnerships.
I assume, 4e, that you want to be both a LP (because you've got some money to invest) and a member of a corporate GP (because you'd like to drag a bunch of your friends money into a deal with you and you want to be in charge so you can keep an eye on things).
You also want to make sure that your personal liability is as limited as possible.
So the way you do this is: you establish a corporation to be the General Partner. You and several of your friends are the shareholders in the GP the shareholders elect a board of directors (which, in the case of a closely held corporation like this one could be all of the shareholders). The board of directors meets regularly and discusses and votes on all the major decisions regarding the LP. keep good notes regarding these meetings. In essence the way you avoid personal liability in a corporation is to make decisions corporately so that no one person is clearly in charge.
The fact that you own shares in both entities (corporation and Limited Partnership) is pretty much irrelevant since both structures exist to prevent liabilty from passing through the entity to you personally. If you are personally the GP the situation becomes much more complex-- don't do that.
So here's a story about an attempt to "pierce the corporate veil" of a corporation I was in that was GP. Hotshot attny for the other side calls up and wants all the corporate records so that he find some chink in the corporate proceedings to start to work away at the corporate veil.
"So what documents do you want?" asks my attny.
"I want everything. Articles of Incorporation, annual filings witht the state, copies of all the minutes of the board of Directors."
"You want them all?" Says my attny.
"yeah, why?" says their attny.
"Well the corporate minute books are currently on volume 5." says my attny.
long pause here
"Never mind," says their attny.
Sorry for the addendum but I just realized you also asked for case law on this and I just don't recall that stuff anymore. Its been 15 years since I did one of these deals. At one time I had a three ring binder 2" thick with all the back-ups and cases. Quite frankly I've got no idea where the binder even is anymore. But this is such standard practice I don't think an attny who does many of these will have any problem signing off on the structure.
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The fact that you own shares in both entities (corporation and Limited Partnership) is pretty much irrelevant since both structures exist to prevent liabilty from passing through the entity to you personally.
My question isn't about piercing the corporate veil, it's about piercing the LP's veil. The problem, as I see it, is having a plaintiff's attorney try to strip you of limited liability *as limited partner* on the basis that acting as officer of the corporate GP makes you a defacto general partner since you are making decisions about running the LP, and as we all know limited partners lose limited liability when they run the partnership. Having good records isn't a defense to this claim; in fact, they bolster it. The question is whether this is too paranoid a scenario.
I'm sorry, I thought you were going to have a corporate general partner. Your role as a limited partner is unchanged by being a shareholder or director in a corporate general partner. The reason a LP looses is liablity protection is that he's the GP not that his status as a LP somehow mysteriously changes, the GP always has liability.
You protect yourself from that liability by not being the GP-- i.e. by having a corporate GP. In that case the only veil to be pierced is the corporate one.
[ Edited by commercialking on Date 05/16/2004 ]