Understanding Limited Partnerships: Structure, Liability, and Rights
Limited Partnership: Key Features and Legal Framework
A limited partnership is characterized by the coexistence of partners who have unlimited liability for partnership debts (general partners) and partners whose liability is limited (silent partners). A distinction is made between:
- Simple Limited Partnership (commandites), as regulated in the Commercial Code.
- Limited Partnership by Shares, in which the silent partners’ participation is represented by shares of stock.
A limited partnership must be incorporated in a public deed, which must be recorded at the business registry. The partnership’s name is formed in the same way as general partnerships, adding the words “Limited Partnership.” The name may not contain the names of the silent partners, and if their names are included, they shall be liable to third parties to the same extent as general partners. The commercial law sets forth that limited partnership companies shall engage in business under the name of all the general partners, of some of them, or one alone. In the latter two cases, the words “and Company” must be added to the name or names stated, and in all of them, those of “Limited Partnership Company.”
Internal Relationship
The general partners of the limited partnership have the same rights and obligations as the partners of the general partnership; hence they have unlimited liability, while the liability of silent partners is limited to a special predetermined amount (summa comanditaria). Such liability can be greatly increased if the silent partner includes his name in the partnership name or consents to its inclusion. In this case, the law provides that the silent partner shall be liable to the same extent as the general partners.
Management of Limited Partnership
Only general partners may be managing partners, and pursuant to the law, silent partners are forbidden from participating in the management of limited partnerships. Nevertheless, as the legal framework of the general partnership is applicable to the management of the limited partnership, a branch of scholars feels that only external acts of management, which imply relationships with third parties, enter into the above prohibitions on silent partners. Thus, acts of pure consultation or supervision would seem to be exempt from the prohibition.
Therefore, a special feature of this type of company is the fundamental obligation of silent partners based on the following points:
- Contribution of a certain part of partnership assets. Such contributions consist in goods or rights liable to economic appraisal and may not consist in services. The contribution of silent partners must be contained in the partnership agreement. Their liability is limited to such amounts as they contributed or were required to contribute.
- Pursuant to the law, the same liability for partners of the general partnership shall apply; hence damages caused by malice, abuse of power, or gross negligence give rise to the obligation to compensate the partnership.
Rights of Silent Partners
The most significant rights of the silent partners are the following:
- They have the right to share in profits and in the distribution of assets on liquidation. Unless otherwise agreed to in the partnership agreement, both silent partners and general partners share in losses in proportion to their share in the partnership.
- The right to information is set forth in the commercial code that states a more limited right than the one conferred to general partners. The partnership agreement should contain the times at which silent partners may examine the status of management. If the agreement makes no provision in this regard, silent partners shall be notified of the partnership balance at the end of each fiscal year. Silent partners shall have no less than 15 days to examine the background and necessary documents to verify the balance sheet and judge operations.
If a general partner wishes to transfer his share in the partnership, all other partners, both silent and general, must give their unanimous consent.
External Relationship
The power of representation belongs to the managing partners and implies use of the partnership’s name. The prohibition of the silent partner to manage the company is due to the intention to deprive him of all power of representation. The limited partnership shall engage in business by the same power of representation as the general partnership.
- The liability of the limited partner for the obligations and losses of the company shall be limited to the funds they have contributed or undertaken to contribute to the partnership.
- If the agreement contains no relevant provisions, their share of the losses will be in proportion to their share of the capital. Partnership agreements can include the proviso that the partnership bears the losses of silent partners.