A Limited Partnership Agreement (LPA) is a binding contract that creates an LP structure by defining the obligations, roles, and profit-sharing of general and limited partners and restricting the responsibility of the latter to their participation in the company.

You might desire to start a business with a friend, partner, or coworker occasionally. Anyone who agrees to run a business with another person has a chance to split the company's gains, losses, and taxes.

A limited partnership agreement is the best way to ensure that everything is documented and that there is no misunderstanding between the partners.

Table of Contents

• What exactly is a Limited Partnership Agreement?
• When to Use a Limited Partnership Agreement?
• What is Needed to Include in a Limited Partnership Agreement
• Additional points to include in the Limited Partnership Agreement
• FAQs on Limited Partnership Agreement
• Limited Partnership Agreement Sample

What exactly is a Limited Partnership Agreement?

A Limited Partnership Agreement (LPA) is a legally binding contract that outlines the terms, conditions, and governance structure of a limited partnership. This agreement is typically created when forming a limited partnership and is a critical document for defining the rights and responsibilities of each partner within the business. Here are the key elements typically included in a Limited Partnership Agreement:

1. Partnership Information: This section includes details about the partnership, such as its name, principal place of business, and the purpose or nature of its business activities.

2. Partners: The agreement identifies the general partners and limited partners, providing their names and contact information. It also specifies their roles and responsibilities within the partnership.

3. Capital Contributions: The LPA outlines the initial capital contributions made by each partner, which may include cash, assets, or services. It defines how additional capital contributions will be handled.

4. Distribution of Profits and Losses: It specifies how profits and losses will be allocated among partners. General partners often receive a larger share of profits but also bear greater liability, while limited partners have limited liability but typically receive a smaller share of profits.

5. Management and Decision-Making: The agreement defines the management structure and decision-making processes within the partnership. General partners usually have more significant decision-making authority.

6. Withdrawals and Transfers: Procedures for partner withdrawals, transfers of partnership interests, and the admission of new partners are addressed in the LPA.

7. Dissolution and Liquidation: It outlines the circumstances under which the partnership may be dissolved and the process for liquidating assets and distributing proceeds.

8. Indemnification: The agreement may include provisions for indemnifying partners against certain liabilities or losses incurred in the course of partnership activities.

9. Amendments: Procedures and conditions for amending the LPA are specified, ensuring that any changes are made in compliance with the agreement.

10. Governing Law: The LPA typically designates the governing law under which the partnership will operate and resolve disputes.

11. Term of Partnership: The agreement may specify the duration of the partnership or outline the conditions for its termination.

12. Dispute Resolution: It often includes mechanisms for resolving disputes among partners, such as mediation or arbitration.

A well-drafted Limited Partnership Agreement is essential for maintaining clear communication, preventing disputes, and ensuring that the limited partnership operates in accordance with the agreed-upon terms. Legal counsel is often involved in the creation of LPAs to ensure they comply with applicable laws and regulations and meet the specific needs of the partnership.

When to Use a Limited Partnership Agreement?

A Limited Partnership Agreement (LPA) should be used whenever individuals or entities decide to form a limited partnership (LP). Here are some key situations when you should use an LPA:

1. Formation of a Limited Partnership: When you and others intend to establish a limited partnership, it's essential to create an LPA at the outset. This agreement clarifies the roles, responsibilities, and rights of the general partners and limited partners, ensuring that all parties are on the same page.

2. Investment and Capital Contributions: LPAs are particularly important when partners are making significant financial investments in the partnership. The agreement specifies the amount of capital each partner contributes and the terms for additional capital contributions.

3. Operational Control: If the LP involves general partners who manage the day-to-day operations and limited partners who provide capital but have limited involvement in management, an LPA is crucial to define the scope of authority and decision-making power of each partner group.

4. Profit and Loss Distribution: LPAs establish how profits and losses will be allocated among partners, often based on their partnership interests. This is crucial for tax purposes and for determining how the financial benefits of the partnership will be distributed.

5. Liability Protection: Limited partners in an LP benefit from liability protection, but this protection is contingent on not participating in the management of the business. The LPA defines the extent to which limited partners can be involved in management without losing their liability protection.

6. Admission of New Partners: If the LP intends to admit new partners in the future, the LPA should outline the procedures, criteria, and approvals required for new partner admissions.

7. Withdrawals and Dissolution: LPAs include provisions for partner withdrawals, transfers of partnership interests, and the circumstances under which the partnership may be dissolved. These provisions ensure that partners know how to exit the partnership if needed.

8. Conflict Resolution: The agreement typically outlines procedures for resolving disputes among partners, preventing disagreements from escalating into costly legal battles.

9. Compliance with Legal Requirements: Many jurisdictions require LPs to have an LPA in place as part of the registration process. Using an LPA ensures that you comply with legal and regulatory requirements.

An LPA is a fundamental document for organizing and governing a limited partnership. It helps establish clear expectations, protect the interests of all partners, and ensure legal compliance. It's advisable to consult with legal professionals when drafting or reviewing an LPA to ensure that it aligns with your specific partnership goals and complies with applicable laws.

What is Needed to Include in a Limited Partnership Agreement

A Limited Partnership Agreement (LPA) is a comprehensive document that outlines the terms and conditions of a limited partnership. While the specific content of an LPA can vary depending on the nature of the partnership and the preferences of the partners, here are key elements that are typically included:

1. Partnership Information:
   • The legal name and principal place of business of the partnership.
   • The purpose or nature of the partnership's business activities.

2. Partners:
   • The names and contact information of all general partners and limited partners.
   • The role and responsibilities of each partner.

3. Capital Contributions:
   • The initial capital contributions made by each partner, which may include cash, assets, or services.
   • Procedures for making additional capital contributions if necessary.

4. Distribution of Profits and Losses:
   • How profits and losses will be allocated among partners, often based on their partnership interests.
   • Whether there are preferred returns or special allocations.

5. Management and Decision-Making:
   • The management structure of the partnership, including the authority of general partners and the limitations on limited partners' involvement.
   • Decision-making processes, including voting rights and major decisions requiring partner approval.

6. Withdrawals and Transfers:
   • Procedures for partner withdrawals, including under what circumstances a partner can withdraw.
   • Guidelines for transferring partnership interests to other partners or third parties.

7. Dissolution and Liquidation:
   • The conditions under which the partnership may be dissolved.
   • Procedures for the orderly liquidation of partnership assets and the distribution of proceeds.

8. Indemnification:
   • Provisions for indemnifying partners against certain liabilities or losses incurred during partnership activities.

9. Amendments:
   • Procedures and conditions for amending the LPA, including the level of partner consent required for changes.

10. Governing Law:
    • The state or jurisdiction under which the partnership operates and resolves disputes.

11. Term of Partnership:
    • The duration of the partnership or conditions for its termination.

12. Dispute Resolution:
    • Mechanisms for resolving disputes among partners, such as mediation or arbitration.

13. Taxation Provisions:
    • How tax matters, including income allocation and tax elections, will be handled.

14. Confidentiality and Non-Compete Clauses:
    • Clauses specifying confidentiality obligations and restrictions on competition among partners.

15. Buy-Sell Agreements:
    • Provisions outlining how partnership interests can be bought or sold among partners or to third parties.

16. Rights of First Refusal:
    • Any rights of first refusal granted to partners in the event of a proposed transfer of partnership interests.

17. Insurance Requirements:
    • Insurance coverage and requirements to protect the partnership and its partners.

18. Compliance with Applicable Laws:
    • A clause stating that the partnership and its activities will comply with all applicable laws and regulations.

It's essential to customize an LPA to meet the specific needs and goals of the limited partnership. Legal counsel should be involved in the drafting and review process to ensure that the agreement complies with relevant laws and regulations and effectively addresses the unique characteristics of the partnership.

Additional points to include in the Limited Partnership Agreement

In addition to the essential elements mentioned earlier, a well-drafted Limited Partnership Agreement (LPA) may include additional provisions tailored to the specific needs and goals of the partnership. Here are some additional points you might consider including in your LPA:

1. Capital Call Procedures: Specify the procedures for requesting additional capital contributions from partners, including notice requirements and timelines.

2. Management Succession: Outline the process for selecting new general partners or managers in the event of the retirement, resignation, or death of a general partner.

3. Withdrawal Restrictions: Define circumstances under which a limited partner may or may not withdraw from the partnership and any associated penalties or restrictions.

4. Right of First Offer (ROFO): Include a ROFO clause that allows existing partners the first opportunity to purchase the partnership interest of a partner who wishes to sell.

5. Drag-Along and Tag-Along Rights: Address the rights of partners in case a majority of partners wish to sell their interests (drag-along) or a minority partner wants to sell and include the buyer (tag-along).

6. Transfer Restrictions: Specify restrictions on transferring partnership interests to third parties to maintain control and protect the partnership's objectives.

7. Non-Compete and Non-Solicitation Clauses: Include clauses that restrict partners from engaging in competing businesses or soliciting the partnership's employees or clients after leaving the partnership.

8. Tax Allocation Methods: Detail how partnership income, gains, losses, deductions, and credits will be allocated for tax purposes, which can affect partners' individual tax liabilities.

9. Dispute Resolution Procedures: Specify how disputes among partners will be resolved, whether through mediation, arbitration, or litigation, and the jurisdiction where disputes will be resolved.

10. Admission of New Partners: Define the process, criteria, and partner approvals required for admitting new limited and general partners.

11. Change of Control Provisions: Address what happens if a partner experiences a change in ownership, control, or corporate structure, including how it may affect their partnership interests.

12. Succession Planning: Outline procedures for transferring partnership interests upon the death, disability, or incapacity of a partner and how the partnership values those interests.

13. Insurance Requirements: Describe the types and amounts of insurance coverage required to protect the partnership and its partners.

14. Environmental Compliance: If applicable, include clauses addressing environmental compliance, liabilities, and responsibilities to protect the partnership from environmental risks.

15. Data Protection and Cybersecurity: Detail how sensitive data will be protected and specify obligations regarding data security and breach notification.

16. Public Filings and Reporting: Specify any obligations for filing partnership information with government authorities and the preparation and distribution of financial reports to partners.

17. Advisory Committee: Establish an advisory committee composed of limited partners to provide input and recommendations on key partnership matters.

These additional provisions should be carefully crafted and tailored to the specific circumstances and objectives of the limited partnership. It's advisable to seek legal counsel when drafting or amending your LPA to ensure that it meets all legal requirements and serves the best interests of the partners and the partnership itself.

FAQs on Limited Partnership Agreement

What is a Limited Partnership Agreement (LPA)?

An LPA is a legally binding contract that outlines the terms, conditions, and governance structure of a limited partnership. It defines the roles, responsibilities, and rights of general partners and limited partners in a business venture.

Is an LPA legally required to form a limited partnership?

In many jurisdictions, it's a legal requirement to have an LPA in place when forming a limited partnership. Even if not mandated by law, it is highly advisable to create one to establish clear expectations and protect the interests of partners.

What's the difference between a general partner and a limited partner in an LPA?

General partners have active management roles and often bear unlimited personal liability for the partnership's debts and obligations. Limited partners, on the other hand, typically have limited involvement in management and enjoy liability protection up to their invested capital.

Can an LPA be amended after it's created?

Yes, an LPA can be amended, but the process and conditions for amendments should be specified in the agreement itself. Typically, amendments require the consent of the majority or a supermajority of the partners.

What happens if there is no LPA in place for a limited partnership?

Operating without an LPA can lead to misunderstandings, disputes, and potential legal issues. It is strongly recommended to create an LPA to provide clarity on key partnership matters.

Is it necessary to involve legal counsel when drafting or amending an LPA?

While it's not always required, involving legal counsel is highly advisable. Legal professionals can ensure that the LPA complies with relevant laws and regulations, protects the interests of all partners, and addresses the specific needs of the partnership.

Limited Partnership Agreement Sample