American company law traditionally offered a group of businessmen in quest of profit only two choices of business associations: a corporation or a partnership. Both forms have their advantages and disadvantages that depend upon various factors: the size of the envisaged business, its riskiness, capital requirements, need for a separation of ownership and management, liability, desired life of the venture, and transferability of share interests. The partnership has generally been used for smaller enterprises associated with less risk and capital requirements. The corporate form gives businessmen the opportunity to conduct risky business affairs with respect to potential tort liability as well as default risk without being exposed to unlimited personal liability because only the assets of the corporation can be used to satisfy claims. The benefit of limited liability came at the price of disadvantageous double taxation because, unlike a partnership, a corporation has been viewed as an independent entity and its income has consequently been taxed on the corporation’s as well as the shareholders’ level. This has driven smart entrepreneurs to conduct their business affairs in form of a hybrid entity, a combination of a partnership and a corporation, the limited partnership with a corporate general partner. In that form a corporation is the (sole) general partner of a limited partnership which results in limited liability for the owners and managers of this hybrid entity and the advantage of the preferential tax treatment of a partnership. Thus, this entity allows combining the benefits of a corporation and a partnership while reducing their shortcomings.
The goal of this paper is to illustrate the development of the limited partnership with a corporate general partner in the United States over the past four decades and to analyze its advantages and disadvantages. The paper centers on the two main factors that have shaped this form – the recognition of limited liability for its managers and the tax treatment of the limited partnership. For this purpose, the law of the limited partnership including its tax treatment will first be described. Secondly, the development of the hybrid form will be illustrated by means of the pertinent cases and statutory provisions. In the last chapter, I will elaborate on factors that have contributed to the relative unpopularity of the hybrid form in the United States.
Table of Contents
- I. Introduction
- II. The Limited Partnership
- A. Description of the Limited Partnership
- B. Historic Development
- C. Taxation of the Limited Partnership
- III. The Limited Partnership with a Corporate General Partner
- A. Development of the Corporate General Partners
- B. Control Liability of the Limited Partners – the Main Cases
- 1. Delaney v. Fidelity Lease
- 2. Frigidaire Sales Corp. v. Union Properties
- IV. Reasons for the Unpopularity of the Limited Partnership with a Corporate General Partner
- A. Uncertain Legality
- B. Uncertain Law Pertaining to Liability of Limited Partners
- C. Diminishing Taxation Advantages
- D. New and Better Alternatives
- 1. The Limited Liability Company
- 2. The Limited Liability Limited Partnership
- V. Conclusion
Objectives and Key Themes
This paper aims to illustrate the development of the limited partnership with a corporate general partner in the United States over the past four decades, analyzing its advantages and disadvantages. The focus is on the two main factors shaping this form: the recognition of limited liability for its managers and the tax treatment of the limited partnership. The evolution of the limited partnership itself will be examined to provide context. * Development of the limited partnership with a corporate general partner. * Limited liability for managers within this structure. * Tax treatment of limited partnerships and its impact on the hybrid form. * Legal controversies surrounding the hybrid form and the “control rule.” * Reasons for the relative unpopularity of this structure in the US.Chapter Summaries
I. INTRODUCTION: This introductory chapter sets the stage by outlining the traditional choices for business associations in American company law: corporations and partnerships. It highlights the advantages and disadvantages of each, emphasizing the limitations of unlimited personal liability in partnerships and the double taxation inherent in corporations. The chapter introduces the limited partnership with a corporate general partner as a hybrid entity aiming to combine the benefits of both while mitigating their drawbacks. The chapter also briefly discusses the initial legal challenges surrounding this hybrid form and its eventual acceptance, followed by the emergence of other competing business structures. The overall objective is to lay the groundwork for the subsequent analysis of this hybrid structure. II. THE LIMITED PARTNERSHIP: This chapter provides a detailed description of the limited partnership, contrasting it with general partnerships and corporations. It explains the key distinction between general and limited partners, focusing on the limited liability afforded to limited partners. The chapter explores the structure and legal requirements of limited partnerships, emphasizing the formalities required compared to general partnerships. Furthermore, it explains the taxation of limited partnerships and contrasts it with the double taxation associated with corporations. This chapter establishes the foundational legal and structural elements of the limited partnership, providing the necessary background for understanding the more complex limited partnership with a corporate general partner discussed in subsequent chapters. III. THE LIMITED PARTNERSHIP WITH A CORPORATE GENERAL PARTNER: This chapter delves into the development of the limited partnership with a corporate general partner as a hybrid entity. It focuses on the key legal cases that shaped its evolution, particularly those addressing the "control rule"—whether limited partners participating in management incur personal liability. The chapter examines pivotal cases like *Delaney v. Fidelity Lease* and *Frigidaire Sales Corp. v. Union Properties*, analyzing how these rulings influenced the legal understanding and acceptance of this business structure. This section provides a deep dive into the crucial legal precedents that clarified the liabilities and responsibilities within this specific type of limited partnership. IV. REASONS FOR THE UNPOPULARITY OF THE LIMITED PARTNERSHIP WITH A CORPORATE GENERAL PARTNER: This chapter explores the factors that contributed to the limited partnership with a corporate general partner’s relative unpopularity despite its initial promise. It investigates the uncertainties surrounding its legality and the liability of limited partners, along with the diminishing tax advantages it once offered. The emergence of newer alternatives, such as limited liability companies (LLCs) and limited liability limited partnerships (LLLPs), is highlighted as a key reason for its declining use. The chapter analyzes the competitive landscape and shows how newer structures offered similar benefits with fewer drawbacks.Keywords
Limited partnership, corporate general partner, limited liability, pass-through taxation, control rule, Delaney v. Fidelity Lease, Frigidaire Sales Corp. v. Union Properties, Limited Liability Company (LLC), Limited Liability Limited Partnership (LLLP), American company law, business associations.
FAQ: A Comprehensive Guide to the Limited Partnership with a Corporate General Partner
What is the main focus of this paper?
This paper analyzes the development, advantages, and disadvantages of the limited partnership with a corporate general partner (LP-CGP) in the United States over the past four decades. It particularly focuses on the impact of limited liability for managers and tax treatment on this hybrid business structure.
What are the key themes explored in the paper?
The key themes include the development of the LP-CGP, limited liability for managers within this structure, the tax treatment of limited partnerships, legal controversies surrounding the “control rule,” and the reasons for the relative unpopularity of this structure in the US. The evolution of the limited partnership itself is also examined for context.
What are the different chapters and their respective contents?
Chapter I: Introduction sets the stage by comparing corporations and partnerships, highlighting the LP-CGP as a hybrid aiming to combine their benefits. Chapter II: The Limited Partnership provides a detailed explanation of limited partnerships, contrasting them with general partnerships and corporations. Chapter III: The Limited Partnership with a Corporate General Partner delves into the development of the LP-CGP, analyzing key legal cases like Delaney v. Fidelity Lease and Frigidaire Sales Corp. v. Union Properties. Chapter IV: Reasons for the Unpopularity of the Limited Partnership with a Corporate General Partner explores factors contributing to the LP-CGP's decline, including legal uncertainties, diminishing tax advantages, and the emergence of alternatives like LLCs and LLLPs. Chapter V: Conclusion summarizes the findings.
What are the key legal cases discussed in the paper?
The paper analyzes Delaney v. Fidelity Lease and Frigidaire Sales Corp. v. Union Properties, two pivotal cases that shaped the legal understanding of the LP-CGP and the “control rule” concerning limited partners' liability.
What are the main advantages and disadvantages of the LP-CGP?
The paper explores the initial advantages of the LP-CGP as a hybrid structure combining the benefits of partnerships and corporations. However, it also highlights the disadvantages that led to its decline in popularity, including legal uncertainties surrounding liability and diminishing tax advantages.
What are the alternative business structures mentioned as competitors to the LP-CGP?
The paper highlights the rise of Limited Liability Companies (LLCs) and Limited Liability Limited Partnerships (LLLPs) as newer alternatives that offered similar benefits with fewer drawbacks, contributing to the LP-CGP’s decline.
What are the key legal and tax aspects covered in the paper?
The paper covers the legal aspects of limited liability for partners, the “control rule” impacting liability, and the tax treatment of limited partnerships, contrasting it with corporate taxation. It also examines the legal uncertainties surrounding the LP-CGP and its impact on its popularity.
What are the keywords associated with this paper?
Key words include: Limited partnership, corporate general partner, limited liability, pass-through taxation, control rule, Delaney v. Fidelity Lease, Frigidaire Sales Corp. v. Union Properties, Limited Liability Company (LLC), Limited Liability Limited Partnership (LLLP), American company law, business associations.
- Quote paper
- Chrysanth Herr (Author), 2006, Alternatives to Incorporation for Persons in Quest of Profit: The Limited Partnership with a Corporate General Partner, Munich, GRIN Verlag, https://www.grin.com/document/60335
