Sometimes investors in California are interested in having the flexibility of a partnership structure but are worried about personal liability. In a limited partnership, there are one or more general partners and one or more limited partners. There always needs to be at least one general partner, and the general partner or general partners will have unlimited liability for the partnership’s debts and liabilities. Under California Corporations Code § 15611, the limited partners contribute capital but don’t get to manage or have other responsibilities and aren’t held liable for partnership obligations that go over their capital contributions. Often, however, an Limited Liability Corporation (LLC) is considered a more favorable vehicle for real estate than a limited partnership in California. For example, all of the owners of an LLC can manage it.
To form a limited partnership in California, investors file a certificate of limited partnership. Limited partners do not need to disclose their names or legal information. There is no legal requirement that a partnership agreement be in writing, but it is important to have one. The agreement will set forth why the partnership is being created, how business is going to be conducted, the rights and liabilities of each partner, and other contingencies. Negotiating and creating a written agreement about how a limited real estate partnership will be conducted can eliminate litigation down the road.
In most cases, a limited partnership is a good way for passive investors in real estate to become involved. A limited partner gets to invest in real estate and share in profits when the project is successful, but they aren’t held responsible for liability when it exceeds their initial capital contribution. The general partners are liable beyond this amount and are considered jointly and severally liable to third parties when a lawsuit arises from their actions on behalf of or in the course of the partnership.
A general partner isn’t liable to limited partners for another general partner’s actions, however, unless they were involved in an action or negligently permitted it. Also, general partners can be forced to share in the loss of partnership capital under a written agreement’s allocations of profits and losses.
In some cases, general partners handle the expansive liability in a real estate partnership by appointing corporate entities instead of individuals to serve as general partners. When this happens, the corporate general partner continues to owe a fiduciary duty to the limited partner, but the shareholders of the corporation acting as general partner aren’t personally liable. Sometimes the shareholders or officers of the corporation serving as general partner are also limited partners, and in that case, they continue to have only limited liability.
If you decide to become a limited partner, you should be aware that you won’t have the right to control how the entity handles its daily business. You will have the right to get information from the partnership, including the right to attend meetings and review records. But maintaining limited liability hinges on restricting your involvement in the daily business. Real estate partnerships can get themselves into trouble if a creditor is able to show that a limited partner was actually in control of the business at the time credit was provided, such that the creditor believed the limited partner was actually a general partner.
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