Is Your Old Limited Partnership Agreement Ready for 2010? PDF Print E-mail

The Uniform Limited Partnership Act of 2008 (Re-RULPA) became operative on January 1, 2008 and governs domestic limited partnerships that are formed on or after that date.  It also governs all foreign limited partnerships as of January 1, 2008. Re-RULPA will govern all limited partnerships in California on and after January 1, 2010.

A limited partnership formed before January 1, 2008, (a “legacy limited partnership”) may elect to be subject to Re-RULPA in the manner provided in its partnership agreement or by law for amending the partnership agreement.  In any event, it will become subject to Re-RULPA on and after January 1, 2010.

When a legacy limited partnership elects to be subject to Re-RULPA, however, certain provisions of the Act, by default, will not apply to the limited partnership at any time (even after January 1, 2010) unless the partners specifically agree to them in the manner provided in the partnership agreement or by law for amending the partnership agreement.  Thus, if such an electing limited partnership wants to have a perpetual duration, it must specifically agree to such a provision when opting to come under Re-RULPA provisions defining when a person may dissociate as a limited partner; what it means when one is dissociated as a limited partner; defining when a general partner may be dissociated in certain cases by unanimous vote or judicial order; and when a limited partnership can be dissolved following the dissociation of a general partner.

The potential target groups at which Re-RULPA was aimed, or enterprises that would work well under it, has been noted in California Continuing Education for attorneys for planning purposes as follows:

Re-RULPA is a stand-alone act, no longer linked to the general partnership statutes.  This change is expected to create a specialized body of law over the long term that will help promote greater certainty than exists today in the area of limited partnerships.

Re-RULPA no longer requires a business purpose for a limited partnership, thus broadening the flexibility of its potential uses.

Re-RULPA provides for a limited partnership to have a “perpetual existence,” thus facilitating continuity for an entrenched management.

If a person dissociates as a limited partner, his or her interest becomes that of a mere transferee, which is an interest that has very few associated rights.  A dissociated limited partner has no right to force a cash-out of this interest and therefore tends to be locked in to the partnership arrangement.

The dissociation of a general partner does not by itself cause the limited partnership to dissolved, and the Act provides more safeguards than does its predecessor, CRLPA, to prevent a dissociation from leading to a dissolution.  This change also furthers the long-term stability of the enterprise.

The fiduciary duties of a general partner are carefully circumscribed and clearly defined, with the aim of promoting greater certainty in how general partners should act.

The information rights of limited partners under Re-RULPA are clearly and comprehensively described, with the general partners having an affirmative obligation to volunteer to any limited partner from whom a consent is sought (without necessity of a demand) all material information known to the limited partnership relating to the subject matter of the consent.

Re-RULPA includes provisions relating to public notice of limited partnership events that give conclusive effect to certain forms of constructive notice resulting from filings in the public record.  This affords definite and clear ways for notice to be given of the dissociation of a general partner (depriving that dissociated general partner of apparent authority to create further obligations on behalf of the limited partnership) and of similar important events affecting the limited partnership.

For a small businesses, a Limited Liability Company (“LLC”) is a good option rather than a limited partnership, especially if the general partner is an individual.  The LLC option is not necessarily the best, however, since California LLCs pay annual fees tied essentially to any gross revenues exceeding $250,000, and these fees can exceed $10,000 per year if revenues exceed $5 million.  It may be preferable from a cost-benefit perspective in such cases to choose a limited partnership with a “1 percent general partner” (corporation or LLC) to achieve the limited-liability goals of the venture in protecting the general partner.

Legacy limited partnerships that do not affirmatively elect to be governed by Re-RULPA will nonetheless become governed by Re-RULPA beginning January 1, 2010, except that they will not be governed by the provisions itemized in Corp C §15912.06(c) unless they specifically act to amend their agreement to be so governed.  This should enable a legacy limited partnership to function under Re-RULPA without becoming bound by certain of Re-RULPA’s potentially more disruptive changes in the law.

PRACTICE TIP: Given the significance of these changes, and their mandatory nature on and after January 1, 2010, you should consider how the mandatory conversion may affect your legal status and should consider taking affirmative steps to review with them the implications of such a conversion. 
 

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