Business Law The Limited Partnership

Limited Partnership

I. Introduction:

Limited Partnership is one of many business organizations that consist of one or more general partners and one or more limited partners. Limited partner has limited in control power, and decision making. Moreover, limited partners also have limited liabilities. In other word, they are liable to the partnership only the amount they invested. However, general partners have the control power, and decision making right. Unlike limited partners, who have limited liabilities, general partners have unlimited personal liabilities which are liable to the partnership not only the amount of money they invested but also the amount of their personal assets if the partnership does not have enough cash to settle all its debts. Therefore, this type of business organization is thought to be a good business form for most business people because it has little risk of paying personal assets if the investors are limited partners.

II. Formation of Limited Partnership:

Cost to form a limited partnership is higher than any other form of businesses, and also more complicated. A limited partnership must file a certificate to the government where the business is operated. That filing certificate must contain whatever information is required by the government and signed by the partners. To form a limited partnership, there are strict and flexible rules which must be followed. Otherwise, the attempt to form the limited partnership fails and a general partnership usually results instead[1].
According to article 14 new of Law on Commercial Rules and Register and Law, the declaration shall be written on a sample form determined by the Minister of Commerce. Such declaration shall include the following information:

1. Full name of the merchant and number of his/her identity card;
2. Name used in practice of trade or pseudonym;
3. His/her date of birth or address;
4. Nationality, and if other nationality,
5. The business objectives;
6. The place and address of the principal business or branches located in the Kingdom of Cambodia;
7. Trademark and sample of signature and the registration;
8. Identification card of the legitimate representative who is responsible and the registration;
9. The commercial establishment through which the applicant has previously conducted business, or establishment which is functioning under the competence of the Ministry of Commerce;
10. Freewill statement made by the applicant indicating that he/her has never been convicted for any commercial activities;
11. The registrar shall copy contents of such statement into commercial register and deliver one of the copies of such statement to the application with a certification appears on bottom to stated that: “have recorded into the Register”.

III. Management and Control:

As mentioned earlier, the limited partnership must have at least one general partner who is personally liable for the debts of the partnership debt. But since this general partner can be a corporation, this requirement does not mean that one of the members of the limited partnership needs to accept potentially ruinous liability. The general partner controls the limited partnership with the same scope of powers as a general partner would have in a standard general partnership. The general partner also owes the limited partnership at least the same level of fiduciary loyalty that a general partner in a general partnership owes, perhaps more. Limited partners in a limited partnership, however, generally do not owe fiduciary duties to one another[2].
According to the Law on Commercial Enterprises, Article 79, states that limited partners shall not participate in the management of the Limited Partnership’s business. However, limited partners may examine the reports and progress of the limited partnership and may give advisory opinions and with regard to the management of the limited partner. Moreover, limited partners may not negotiate any business, act as agent, or allow name to be used in any act of limited partnership. A limited partner who performs any of these acts is liable for the obligation of the limited partnership resulting from these acts. In addition, a limited partner may be held responsible in the manner as a general partner for all the obligations of the limited partnership. If the number of these acts, or the importance of them with respect to the partnership business, indicate that the limited partner in face acted as a general partner[3].
Example of Limited Partnership
Management and Control

Sivorn, Dara, and Sopheak agreed to form a limited partnership to start their cosmetic business. Sivorn and Sopheak agreed to contribute the same amount of money $5,000 and be the limited partner. Dara, who has knowledge in Business Management, is the general partner. They all agree to share the profit equally and file the certificate of partnership. Their grand opening was good. So Sivorn and Sopheak agreed to each other to order more goods from Korea and Japan without asking Dara. One week later the bill came. Dara was surprised because he did not know who ordered all those goods. Them Sivorn and Sopheak told Dara. Dara told them that they have no right to order all the goods because they are just limited partners. However, Sivorn and Sopheak told Dara back that they own two-thirds of the business. So they can order the goods. Are they right?
Answer: No, Sivorn and Sopheak are just limited partners. Generally, limited partners have no right in controlling the business only general partner can. Dara, a general partner, has the authority to order those goods even if Sopheak and Sivorn own two-thirds.
Example of limited Partnership
A limited partner acts like a general partner:
Nara, Sovann, and Cheata agreed to join the limited partnership of operating a restaurant, and contributed $50,000 each. Nara is a general partner, and Sovann and Cheata are the limited partners. During the first 6 months, the business operating is good. Sovann decided to expand the restaurant. Nara also agreed with Sovann and let Sovann handle all the things. Sovann went to get a loan for $250,000 from the bank for one year period with six percent interest rate. He then bought the land and bought some more items necessary for the business. Sovann put a land as collateral. Sovann did all the things on behalf of the limited partnership. Unfortunately, six months after Sovann got a loan from the bank, recession impact the country’s economy. The restaurant had few customers from day to day and got less profit. The majority date came. The bank had to seize those two lands because the partnership could pay back the money, which the partnership borrowed. The bank gave the land for a real estate company to calculate the price. At that time the price of land had dropped. So the land could not settle all the debts the partnership had. Nara had some assets but still could not compensate the debts. So the bank tried to recover their money from Sovann. Will the bank succeed?
Answer: The bank will be able to seize the personal assets of Sovann because he took an active part in management and control part of the business, and if the bank believes that Sovann is a general partner.

IV. Liability:
Limited partnerships have one very large advantage over the general partnership: limited partners do not take on personal liability for the obligations of the partnerships; they are only liable to the extent of the money contributed to the partnerships. The general partner in the limited partnership, however, retains all of the personal liability for partnership debts that one finds in the general partnership entity. Stated in Article: 82 in the law on commercial enterprises: where the property of limited partnership is insufficient, the general partners are jointly and severally liable for the debts of the partnership. A limited partner is liable for the debts up to the agreed amount of his/ [her] contribution, notwithstanding any transfer of his interest[4].

Example of Limited Partnership
Limited Personal Liability
David, Jack, Channa, Sith, and Deth formed a limited partnership to sell electronic merchandise. Channa had a Master degree in Business Administration and Jack had knowledge in computer. Channa and Jack become the general partners. David, Sith, and Deth are limited partners. Each one of them contributes $10,000. The money all of them contributed was enough for buying a building, repairing and decorating that building. They all agreed to get a loan for $59,000 from a creditor to buy their merchandise. After they got the money, they ordered the goods. Unfortunately, on the way of shipment, there was a storm on the sea. And the ship that carried that merchandise sank. The partnership lost everything. The majority date came. The creditor asked them to pay the debts but they could not. The Creditor sued the partnership to pay the debts. Channa and Jack had to sell their personal assets. All their personal assets cost only $10,000. Channa and Jack tried to ask the other three to contribute $3,000 for each of them. Can they do that?
Answer: No, Channa and Jack cannot. David, Sith, and Deth are only limited partners. They are only liable for the amount they contributed. In this case, the amount they contributed was $10,000 each. And that amount had been lost in the partnership already. Therefore, David, Sith, and Deth do not have to contribute any more.

V. Raising Capital:

Limited partnership is a type of business that created for effective raising capital without giving up some of the previous owners’ power. There are two types of capital raising (1) contribution of partners or (2) loan funds.

VI. Taxation:

The taxation of limited partnership is like the taxation in the general partnership. In general partnership the net profit is considered as personal income attributable to the partners based on each partner’s share in the profits.
VII. Transfer or Dissolve of Operations:
The death, retirement, withdrawal, or bankruptcy of a limited partner does not end the existence of the limited partnership, but instead only requires an amendment to the limited partnership's certificate. The limited partnership interest may be transferred to another person without the consent of the other limited or general partners. But the limited partner will still lack some rights unless there is approval by the other partners. The death, retirement, withdrawal, or bankruptcy of the general partner will dissolve the partnership[5].
In conclusion, limited partnership combines some advantages of general partnership with the limited liability that makes some businesspeople feel interested in doing this type of business. It is a type of business that can easily raise capital without reduce the general partners’ controlling power of the business.

[1] http://www.tannedfeet.com/partnership.htm
[2] http://www.tannedfeet.com/partnership.htm
[3] Article 79, Law on Commercial Enterprises.
[4] Article: 82, Law on Commercial Enterprises.
[5] http://www.tannedfeet.com/partnerships.htm