Delaware limited partnership agreement
Definition of a Delaware limited partnership agreement
A Delaware limited partnership agreement is based on a limited partnership. A limited partnership should not be confused with limited liability partnerships (LLP). The former partnership has two or more partners. The general partner oversees the business while the limited partners do not partake in the management of the business. Nonetheless, the general partner of a limited partnership has unlimited liability for teh debt, and the limited partners have limited liability upto the amount of their investment.
Key aspects about a Delaware limited partnership agreement
- A limited partnership exists when two or more partners go into a business together. However, the limited partners are only liable up to the amount of their investments.
- A Delaware limited partnership agreement comprises limited partners and a general partner that has unlimited liability.
- Limited partners are pass-thrpugh entities that offer little to no reporting requirements.
Understanding Delaware limited partnership agreements
A Delaware limited partnership agreement comprises of both limited and general partners. The general partners have unlimited liability and full management control of the entity. On the other hand, limited partners have little to no involvement in the management. They, however, have liability that is limited to the investments they make.
Advantages and disadvantages of Delaware limited partnership agreements
The main advantage of a Delaware limited partnership agreement is the personal liability of the limite partners is restricted. Hence they are only responsible for the amount they invest in the limited partnership. A limited partnership can thus be used by general partners when raising capital for the investment. Most hedge funds and real estate investment partnerships are established as limited partnerships. Further, limited partners do not have to pay self-employment taxes. Limited partnerships are pass-through business entities thus their income or loss is calculate on their personal tax returns.
However, a Delaware limited partnership agreement hasvarious disadvantages. First, limited partnerships require that the general partners have unlimited liability. Thus they are fully responsible for the management control and debts of the entity. They are also responsible for any mishandling of business dealings. Another disadvantage of Delaware limited partnership agreements is that the limited partners are only allowed limited involvement in the operations of the entity. If their function is deemd non-passive then they end up losing personal liability protection.
Summary of the pros and cons of Delaware limited partnership agreements
Pros of a Delaware limited partnership agreement
- Protection of personal liability for the limited partners.
- Pass-though business entities for taxation unlike other entities.
- Ease of establishment and reporting since annual meetings are not necessary.
- Less formal and flexible structure.
- No self-employment taxes for the limited partners.
Cons of a Delaware limited partnership agreement
- General partners have unlimted personal liability though they have management control of the limited partnership.
- Limited partners are restricted from participating in the management of the limited partnership.
- Ownership of the limited partnership is harder compared to other entities like limited liability companies.
- A Delaware limited partnership agreement does not provide for much flexibility in chaning the management roles.
A Delaware limited partnership agreement and business
Businesses that form limited partnerships do so to operate or own various specific assets, such include real estate investment partnership or limited partnerships for managing oil pipelines. The general partner has contrl over the assets and is also vested with management responsibilities. He is also personally liable for any debts that the entity incurs. The rest of the partners, that is teh limited partners, serve as investors and their personal responsibilty is limited to the investements they make.
Differnce beteen a limited liability company and a limited partnership
Both limited liability companies and limited partnerships are flexible in terms of their structures, splitting of profits, taxes, and splitting of responsibilities. A Delaware limited partnership agreement permits limited partners to invest without having to take up management roles or any personal liabilities. On the other hand, the general partners bear all the liability. However, with a limitd liability compnay, the owners can protect themselves from personal liability but all of the play a part in management. Further, a Delaware limited partnership agreement provides that a limited partnership should have at least one limited partner.
Difference between a limited partnership and limited liability partnership
A limited liability partnership and a limited partnership have similar structures. Nonetheless, Delaware limited partnership agreements provide for limited partners and general partners while limited liability partenrships have no general partners. Further, all the partners provided for in a Delaware limited partnership agreement have limited liability.
Model Delaware limited partnership agreement
A standard model Delaware limited partnership agreement is a requirement in the private equity asset class owing to the time, cost, and complexity of negotiating the invetment terms. The general partners have an interest in th reduction of the length of the side letter agreements, provision of fundraising certainty, and lowering teh fund costs. In a similar manner, the limietd partners desire to have fair and transparent terms that elabrate the obligations and rights while still reducing the costs of negotiations.
Further, most private equity funds are formed as limited partnerships with the main legal document being the Delaware limited partnership agreement. The agreeent outlined the legally binding relations between the investors and the general partner. For private equity funds, the invetors are the limited partners and the fund manager is the general partner. Moreover, the partners are at liberty to agree on the commercial terms they chose to be in the Delaware limited partnership agreement. However, the limited partners do not take part in the management of the limited parnership and if they do they ris losing their liability status.
Further, the Delaware limited partnership agreement outlines the obligations and rights and also seeks to cover all teh aspects of the private funds. Such include the operation, formation, and termination of the partnership from the main commercial issues. Such include sharing of profits, investment policy, expenses, and fees. Other detailed administrative and constitutional issues like when the manager can launch novel reports, accounts, funds, and provision of information is also included in the agreement.
Clauses in a Delaware limited partnership agreement
- Parties
This clause outlined the parties that are bound by the Delaware limited partnership agreement. The initial parties may just include the general partner and only one limited partner. Moreover, the rest of the investors are admitted to the partnership by signing a separate deed that outlined their agreeent to adhere to the terms of the Delaware limited partnership agreement.
- Introduction or recitals
This clause outlines by way of general introductio the reasons why the Delaware limited partnership agreement is being entered into by the relevant parties.
- Defintions and interpretation
For easy referencing, definition of terms used in the agreement are gathered together at very front of the document. The common practice is to capitlaize the defined terms like the accounting perios in the text. Additional rules may also be set out on how the agreement ought to be interpreted.
- Name and place of business
The self-explanatory statement are required by the law. A limited partenrship should have a name. The name and the prinicipal place of business, along with other key details should be regisetred with teh registrar of companies.
- Establishment
The information that is contained in this section differs among various agreements. A clause that is usually included is the one that provides for the partnership to be registered as a limited partnership with the regitrat of companies. If a limited partenrship is not registered as such, the agreement will have affects as a simple partnership agreement. Hence the investors will be treated as general partners and they will not benefit from the limited liability status.
- Purpose of the partnership
This clause reflects on the description of the fund as outlined in the information memorandum. Further, it binds the general partners to carry on the investment funds’ activities accordingly. The clause may also touch on the investment constraints and restrictions governing the operation of general partners.
- Duration of the partnership
The agreement sets out a specific time for the life of the partnership. Basically, this is ten years from the first date on which adequate investors commit to invest the required aggregate amount for the fund to be established. Provision will usually be made for teh extension of the partenrship’s life.
- Legal opinions
Before investing in the partnership an investor desires certain comfort in teh form of opinions to be issued by the partnership’s legal advisers. In addition to any specilaist opinions required the opinions are normally needed to cover various aspects. Such include the operation of limited liability, tax status, and other investors.
- Signing of the document by investors
An investor would expect to sign the deed of adherence to become a partner and be bound by the terms of the agreement.
- Miscellaneous legal issues
Such include governing law and jurisdiction, power of attorney, confidentiality, and notices.
References
https://uk.practicallaw.thomsonreuters
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