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 Core Themes
This work examines the evolution, legal status, and practical application of the limited partnership with a corporate general partner in the United States over the past four decades, specifically analyzing how the balance between limited liability and tax advantages has influenced its rise and relative decline.
- The historical development of the limited partnership structure.
- The "control rule" and the personal liability of limited partners acting as corporate officers.
- The impact of tax regulations and shifts in U.S. tax policy on business entity selection.
- The emergence of more flexible alternatives like the LLC and LLLP.
- Comparative analysis of landmark legal cases regarding corporate and individual liability.
Excerpts from the Book
B. Control Liability of the Limited Partners – the Main Cases
As the legality of the limited partnership with a corporate general partner became widely accepted, the prominent question remained whether limited partners that were also officers, directors, and stockholders of the corporate general partner could actively manage the limited partnership in their position as officers and directors without incurring full personal liability. Section 7 of the Uniform Limited Partnership Act provides that any limited partner that becomes active and exercises control over the partnership becomes liable as a general partner. As many businessmen sought the limited partnership with a corporate general partner especially for the purpose of preventing double taxation and conducting business without incurring personal liability, this question was of utmost importance for the popularity of this business form. There are two, in that respect contradictory, state Supreme Court decisions dealing with the liability of a limited partner. The Texas Supreme Court in Delaney v. Fidelity Lease, Ltd. rejected the corporate fiction; the Washington Supreme Court upheld the corporate limited liability in Frigidaire Sales Corporation v. Union Properties.
Summary of Chapters
I. Introduction: Outlines the historical context of U.S. company law and the emergence of the hybrid limited partnership as a strategic tool to combine corporate limited liability with partnership-style tax benefits.
II. The Limited Partnership: Describes the structural evolution of the limited partnership, its historical roots, and the pivotal role that tax treatment played in its adoption by businesses.
III. The Limited Partnership with a Corporate General Partner: Explores the birth of the hybrid form, the legal challenges regarding corporate general partners, and the judicial conflicts regarding the control rule.
IV. Reasons for the Unpopularity of the Limited Partnership with a Corporate General Partner: Analyzes the factors behind the decline of this hybrid form, including legal uncertainties, shifting tax laws, and the availability of superior alternatives like LLCs.
V. Conclusion: Synthesizes the development of the limited partnership, concluding that while it was once a groundbreaking tax and liability vehicle, newer forms have rendered it largely obsolete outside of specific niche applications.
Keywords
Limited Partnership, Corporate General Partner, Limited Liability, Pass-through Taxation, Control Rule, Delaney v. Fidelity Lease, Frigidaire Sales Corp. v. Union Properties, Tax Reform Act, Corporate Veil, LLC, LLLP, Business Association, Tax Shelter, Fiduciary Duties, Uniform Limited Partnership Act.
Frequently Asked Questions
What is the primary subject of this research?
The work focuses on the evolution and legal challenges of the limited partnership with a corporate general partner in the United States, specifically exploring why this business entity gained popularity and subsequently faced a decline.
What are the core thematic areas?
The core themes include the intersection of corporate law and partnership tax regulations, the liability of passive investors versus active managers, and the emergence of competing modern business entities.
What is the central research question?
The central inquiry asks how the legal landscape—specifically regarding control and liability—and changes in tax legislation influenced the lifecycle and eventual relative unpopularity of the limited partnership with a corporate general partner.
Which methodology is employed?
The author employs a legal-historical methodology, utilizing an analysis of statutory provisions, uniform acts, and precedent-setting case law to trace the evolution of the hybrid entity.
What does the main body address?
The main body details the historical growth of partnerships, the controversy surrounding corporate general partners, the contradictory court rulings (Delaney vs. Frigidaire), and the subsequent transition to newer alternatives.
Which keywords best describe this study?
The study is best characterized by terms such as Limited Partnership, Corporate General Partner, Limited Liability, Tax Shelter, and the "Control Rule."
Why did the Delaney decision create legal conflict?
The Delaney decision rejected the "corporate fiction," arguing that limited partners who acted as corporate officers effectively exercised control and should therefore face personal liability, contradicting the intent of the limited partnership structure.
How does the LLLP offer an advantage over the hybrid limited partnership?
The LLLP provides similar liability protection and tax benefits but is significantly less complex and costly, as it eliminates the need to maintain a separate, adequately capitalized corporate general partner entity.
- 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
