Limited partnerships are commonly used here in San Diego and elsewhere in California. For example, films and other theater and musical productions are often produced through the use of limited partnerships. Limited partnerships are a type of business entity specifically allowed by California law that combines many of the best features of a general partnership and a corporation without some of the less desirable features of each. See Cal. Corp. Code, §15900 et seq. Under a limited partnership structure, the limited partners have limited liability which is the “good” feature of a corporation, but do not have the joint and several liability of being a general partner (the “bad” part of being in a general partnership). As business entities, limited partnerships are also flexible in how they can be managed and have few corporate formalities, unlike corporations. For example, there are no annual meetings required, there is no board of directors, there are no stock certificates to issue, and more. The limited partners also have a higher protection against the legal concept of veil piercing since there are fewer formalities to honor which removes a number of legal factors going to the issue of piercing.

Limited Partnership Advantages

Limited partnerships are particularly good business structures for focused, maybe “one-off,” profit-making ventures that are not expected to last indefinitely. If you open a retail shop, there is a hope and sense that the shop will grow and expand and last forever. A limited partnership may not be the best vehicle for such an endeavor. however, real estate development, films and other productions, gas and mineral exploration and extraction, product development and similar types of projects are good for the limited partnership structure.

Limited partnerships are also particularly good vehicles for labor/cash partnerships in which one partner is bringing labor and expertise to the venture and the other is investing money. The money investors tend to want a cap on the risk. Being a partner in a general partnership does not limit the down-side risk; however, being a limited partner in a limited partnership does.

Limited partnerships are also particularly good vehicles when business entities want to work together. Most of us think of “partners” as people and natural individuals. But under the limited partnership structure, “partners” can be other partnerships, limited partnerships, corporations, limited liability companies, and other corporate structures.

Limited Partnership Structure

In general, under California law, a limited partnership must have at least one “general partner.” That is the person or entity that manages the partnership and is the person/entity with the liability for the debts and obligations of the limited partnership if the limited partnership fails. The limited partnership can have an unlimited number of limited partners who have no management authority and cannot bind the limited partnership to any contract. In exchange for the limited role, the limited partners have limited liability; their liability is limited to the amount of money that they have invested.

In the event of success, the details on how the limited partners receive a return on investment depend on how the limited partnership agreements are written. Sometimes, limited partners receive a fixed return on their investment or some payment based on revenue and income. Note that because of the passive nature of the investment, limited partnership shares are considered “securities” under California law. So, caution must be taken when offering the shares for sale. The offering/sale must be registered or must comply with various exemptions.

Limited Partnership Example

Here is an example of how a limited partnership structure might work: Tim and Tom want to purchase a dilapidated house and “flip it” after making repairs and remodeling. Both are talented and experienced in the construction trades and, as such, expect to inject a good deal of “sweat equity” into the project. However, they are cash-poor. “No problem,” they say. Tim and Tom form a California S-Corp — ManageCo Inc., with the help of an experienced San Diego corporate attorney. Then, they have their attorney form a California limited partnership for them with ManageCo Inc., serving as the general partner. Tim and Tom then begin seeking limited partners to invest money. Their experienced San Diego corporate attorney drafts the limited partnership agreements and drafts and files the required securities documents and filings to ensure compliance with the securities laws. Tim and Tom succeed in attracting limited partners, money is invested, and Tim and Tom now have the capital they need to purchase, renovate, and flip real property.

Contact San Diego Corporate Law Today

If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can draft your partnership and limited partnership agreements and has extensive experience with federal and California securities laws. Mr. Leonard can also help limited partnership with all the other legal services necessary for a successful business. Mr. Leonard can be reached at (858) 483-9200 or by email.  Mr. Leonard proudly serves business owners and residents in San Diego and in the surrounding communities. Like us on Facebook.

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