Rights of a Limited Partner: Everything You Need to Know
Also referred to as a “silent partner,” a limited partner is a business partner whose influence and liability within the company is related to their investment.3 min read
Updated November 5, 2020:
The rights of a limited partner are more clear-cut than you realize. Sometimes referred to as a “silent partner,” a limited partner is a business partner whose influence and liability within the company is related to, or limited by, their investment (generally, financial) in said company. Simply put, a limited partner makes a financial contribution to the company and has a share of the profits but does not have much say or control over the business’s operations.
For starters, any business relationship that is defined as a limited partnership is going to have at least one general partner and at least one limited partner. Additionally, limited partners do not typically have much involvement with the day-to-day operations of a business, and therefore the Internal Revenue Service considers any income they receive from their involvement to be passive income.
However, if you are a business owner or general partner who is committed to keeping your limited or silent partner held in that capacity, you will want to ensure that their involvement does, in fact, remain limited. If a limited partner ends up putting in 500 hours or more a year, they could wind up being considered a general partner.
Something else a limited or silent partner will want to consider is that if they’re in a position to exercise a great deal of control over the company or have a lot of input over the day-to-day operations, they could then be held liable, just as a general partner would. However, there are some activities in which a limited partner can engage which will not impact their level of liability, (these are known as, “safe harbors”) including:
- Serving as an agent, contractor or employee of the company
- Serving as board member, officer, director or shareholder of the company, provided they do not own a majority share
- Providing consultation to the general partner(s) of the company
- Attending shareholder or board meetings
- Voting on changes that may affect the nature of the limited partner relationship
Essentially, a person who is serving as a limited partner may actually have a bit more say than they realize, yet for the purposes of protecting their liability, it is important to keep everything in check.
As a Limited Partner, What Are My Legal Rights?
So, you are engaged in a business relationship in which you are a limited partner. You know you cannot try to exercise too much control or provide too much input, and you know that you need to keep the number of hours you serve the company, per year, to under 500 hours. But, chances are, you didn’t get involved with this company solely to provide seed money and then receive a check on quarterly, bi-yearly, or annual basis. After all, most people who invest in companies, even within the limited partnership capacity, have some sort of expertise that can be utilized by the business. As such, you may be wondering what you can actually do.
Well, a big right that you have (and, an important one) is voting. As a limited partner, per the General Partnership Act, limited partners are permitted to vote without taking on liability. Areas in which you may be voting, include:
- The dissolution of the limited partnership agreement
- Disposal of corporate assets
- Amendments to the partnership agreement
- Admission or removal of partners, either limited or general
- Any fundamental changes in the scope of the company
As a limited partner, you have some additional rights, besides voting, as well. For example, you have a right to see the company financials and accounting records. The thought process behind this particular right is that, as someone who has made a financial investment in the company, while your involvement may be limited, you do have a right to see how funds are being managed.
You also have the right to withdraw yourself from the partnership. Your partnership agreement should contain language regarding how it is expected to go about doing this, but in the absence of that type of provision, limited partners can typically request to withdraw from the business partnership by given at least six months written notice.
If you need help with the rights of a limited partnership, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.