Question

Why do you think some states have adopted statutes that specifically provide that limited partners do not lose their limited ability status just because they participate in the partnership's management?

Answer 1

The Uniform Limited Partnership Act (ULPA) under section 7 defines, " a limited partner shall not become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business." According to limited partnership agreement, the problem arise during the drafting of the agreement as what comprises the participation of limited partner in the control of business. As participation in the control of the business is not specifically designed, therefore any type of involvement will convert the limited partner liability to general partner liability. Limited Partner enjoys the liability limited to his share in capital in case of loss, therefore it will be a penalty for him to participate in the affairs of business.

Considering the above problem in drafting the agreement of limited partnership, some states have adopted statutes that specifically drafts the role and participation of limited partner in business affairs so that they do not loose their limited status.

For example, a state may draft statutes which states that a limited partner may from time to time examine into the state and progress of the partnership business, advice as to its management and act as attorney at law, but he may not act as agent of partnership for any purpose as this act will make him liable as a general partner.