Venture Capital firms and private investors have commonly used Limited Partnerships (LP, L.P. or LPs) to secure their interest in their investments. Commonly this can throw novice founders or over-educated executives for a loop.
A general partnership is easy to form. If two or more person associate as co-owners a business for profit and take no steps to further formalize their agreement, their is a partnership. Meaning; partnerships are easily formed.
Traditional routes of issuing stock or warrants complicate matters for future investors as well as internal book keeping. In addition, issuing stock sometimes has tax consequences on the company and the person receiving the stock.
In comes the limited partnership. In a Limited Partnership an agreement is made between the general partner (the one managing the partnership) and limited partners (those that have passively invested). Limited Partnerships, unlike many stock transfers or sale of securities generally do not have to be registered with any governmental agency. This allows venture capital firms and investors to structure creative deals without altering market capitalization, at least in the short run, if they so choose.
The LP is also a powerful tool when raising capital. Since no requirements for filing in States or local governments are necessary for LPs, they can begin to seek interest by selling Partnership Interests to Limited Partners without registering the company. Many firms start capital raises in this manner and then convert the Partnership into an LLC or Inc. for further liability protection. While the limited partners generally are not held liable for the actions of the general partner, if the courts determine that a limited partner was in control, liability may ensue.
Partnerships in general are controlled by Partnership Agreements. Limited Partnerships in general are controlled by Limited Partnership Agreements. These are simply agreements devised and agreed upon by the partners/limited partners.
In the absence of any of these agreements, in the United States, the Uniform Partnership Act (UPA) established rules of law that control the relationship between the parties of the partnership. The UPA spells out the definition of a partnership as well as “When Property is Partnership Property” (UPA Section 204), Partner’s Liability (UPA Section 306) and Partner’s Rights & Duties (UPA Section 401).
If you are in need of assistance navigating or developing Limited Partnership Agreements or Partnership Agreements in general; contact us today.