Series 22 Exam Lesson 4 Limited Partnerships

Lesson 4 Limited Partnerships:

A limited partnership is a partnership that allows all of the economic events that happen in the partnership to flow through to everyone involved.
Examples of economic events:
• Income
• Losses
• Tax credits
• Deductions
• Gains

There are two different kinds of partners that can be part of a limited partnership: limited partners and general partners.

• Limited partners do the following:
• They put up the investment capital
• Can only lose what they invest. (That’s why they are limited)
• They receive any benefits of the partnership
• They may vote to change to partnership’s objective.
• They may vote to change or remove a general partner. They can also sue the general partner if they feel they have been wronged.

They cannot, however, exercise any direct control of the partnership. This is another way in which they are limited. If they do this, they lose their status as a limited partner and become a general partner.

The general partner is either a single person or a whole corporation that actually controls the business side of the partnership. Their liability is unlimited, unlike the limited partners. They are allowed to buy and sell property and real estate in behalf of the partnership, they can receive compensation for their management responsibilities, and they can enter into legal contracts on behalf of the partnership.

The general partner has to maintain a financial interest in the partnership. This has to amount to at least one percent of the total value of the partnership.

There are several things that they are not allowed to do. They are not allowed to commingle personal funds with the funds of the partnership. They cannot do anything that competes with the partnership. They are also not allowed to borrow from the partnership.

There are not any tax consequences for partnership level. For a direct participation program to qualify for tax advantages, they have to avoid at least two of the six attributes of a corporation. The six attributes are:

• Continuity of life
• Profit movie
• Central management
• Limited liability
• Associates
• Freely transferable interest

It is not possible to avoid some of them, such as have associates or having a profit motive. There is also always someone is acts as the manger for a partnership, so there is always central management. It is much easier to avoid continuity of life (by putting a fixed termination date on the partnership) and freely transferable interest. (By limiting how interest can be transferred)

The Partnership Agreement
This is the founding document of the partnership and all members must be given a copy. It sets forth the terms and conditions of the partnership, and states the business purpose. It outlines what the general partner’s responsibilities and powers are, and any limits that are in place.

In order to create this document, the general partner has to file a document called a certificate of limited partnership with the state where the partnership is being created. The certificate has to have the following information:

• The name and address of the partnership
• A description of the business done by the partnership
• The term (length) of the partnership
• The size of each of the limited partner’s investments
• The conditions under which limited partners can gain an interest
• The conditions under which the partnership can be terminated.
• The projected date by which the capital will be returned, if applicable.

If any of these things change, this has to be updated on the certificate filed at the state level, within 30 days.

Most of the time, limited partnerships will be offered to investors through a private placement, and each of these investors must be given a document called a private placement memorandum. Usually, these kinds of placements can only be offered to accredited investors, who are well established and who meet certain income guidelines. Sometimes, these slots are offered to the general public through a standard public offering. Anyone who purchases this way has to receive a prospectus.

If there is a secondary market for slots in the partnership, it is known as a master limited partnership. (MLP) Anyone who wants to become a limited partner in an MLP has to complete what is called a subscription agreement, which includes the following elements.

• A power of attorney that appoints the general partner
• A statement that reveals the prospective limited partner’s net worth
• A statement that disclosed the prospective limited partner’s income
A statement that that prospective limited partner accepts the risks associated with the partnership.