Question

Nicolas Flamel formed a limited partnership with his father-in-law, Tom Riddle, to open an upscale French restaurant in a mid-western town. Mr. Flamel was the general partner and owned 75 percent of the business. Mr. Riddle, with 25 percent ownership, was the limited partner and invested $100,000. After one year, difficulties in the restaurant's operation caused business to drop off, and Mr. Flamel called Mr. Riddle for advice.

After hearing of the difficulties, and concerned with the security of his investment, Mr. Riddle traveled from Arizona to Indiana to visit the operation. Upon observing the operation for two days, the two partners decided to launch a large and expensive television ad campaign to increase flagging sales. Mr. Riddle designed the campaign with the help of Brandon Advertising and Video, a local advertising agency specializing in television commercials.

Despite an immediate increase in sales, volume continued to decline, and finally, three months after the ad campaign launched, the restaurant closed its doors. Total debts at the time the restaurant closed equaled $400,000, with assets of the partnership only being $200,000. Included in the debt was $150,000 owed to the advertising agency. The agency sought payment directly from Mr. Riddle.

Mr. Riddle claimed that his liability was limited to the $100,000 he had previously invested in the business, and refused to pay any additional money. The Brandon Advertising Agency sued the limited partnership, as well as Nicolas Flamel and Tom Riddle individually.

1.      By advising Mr. Flamel and hiring the advertising agency, did Mr. Riddle forfeit his limited partner status? Why or Why not?

2.      Is Mr. Riddle liable for the outstanding debts of the limited partnership? Why or why not? If so, how much and why?

Answer 1

1) A Limited Liability Partnership or LLP is a form of company which is different than a partnership in the sense that its partners have limited liability. The LLP is considered as a separate entity and the partners have liability only to the extent of invested capital. Further, the partners in the LLP have the right to oversee the management of the company.
Considering the above situation in which the restaurant was formed as an LLP and Mr. Riddle advised was an LLP partner who also advised in the company matters. However, he has not breached LLP rules by hiring the advertising agency or advising the firm in operational matters. Mr. Riddle was within his statutory rights and did not forfeit his status.

2) A Limited Liability Partnership is a legally registered partnership firm which could be distinguished from the normal partnership that the liability of the partners is limited to their invested capital only.
The restaurant business was formed as an LLP and investment by Mr. Riddle was $100000. According to the legal structure of an LLP, Mr. Riddle is liable for only $100000 of the total debt.