Last year, Governor Christine Gregoire signed into law the Uniform Limited Partnership Act, or ULPA.  ULPA modified Washington's existing limited partnership statute, which was based on the Revised Uniform Limited Partnership Act, or RULPA.  ULPA became effective for new limited partnerships on January 1, 2010, but generally takes effect for existing limited partnerships, with certain significant exceptions, on July 1, 2010.  This update highlights the most significant differences between ULPA and RULPA, and identifies the effects of those changes on the operations and governance of limited partnerships.  It also describes additional ULPA changes that existing limited partnerships must affirmatively adopt.

ULPA Relaxes Restrictions on Limited Partners

ULPA substantially relaxes the restrictions on the activities of limited partners, allowing them to engage in a variety of activities without being recharacterized as general partners, with corresponding joint and several liability.

Limited Partners' Names May Be in the Partnership Name.  ULPA eliminates the RULPA requirement that the partnership's name not include the name of a limited partner.  Under ULPA, the partnership's name may include the name of any partner, general or limited.

Limited Partners May Participate in Management Without Incurring Liability as General Partners.  ULPA increases the protection of limited partners against liability for the obligations of the partnership.  Limited partners have no liability for the obligations of the partnership, regardless of participation in management or control.  Under RULPA, limited partners were liable to certain third parties for partnership obligations if they participated in the control of the partnership. 

Practical Tip Amendment to Partnership Agreement May Be Required to Allow Limited Partners to Participate in Management.  The change to management liability automatically applies to existing partnerships, beginning July 1, 2010, which means that limited partners may participate in management without further liability under the statute.  Most partnership agreements for existing limited partnerships, however, separately describe and limit a limited partner's rights to participate in management.  If that is the case, for limited partners to have greater management participation in an existing limited partnership, the existing partnership agreement may need to be amended to so provide.

Limited Partners Are Not Subject to Fiduciary Duties.  ULPA expressly eliminates fiduciary duties for limited partners.  While RULPA never specified whether limited partners had fiduciary duties, the linkage of RULPA to the Uniform Partnership Act arguably imposed fiduciary duties on limited partners.  Regardless of this change, a limited partner under ULPA must still act consistently with obligations of good faith and fair dealing when carrying out duties under the statute or the partnership agreement.

ULPA Permits Involuntary Dissociation of Limited Partners.  Under RULPA, dissociation occurred only upon events specified in the partnership agreement.  ULPA changes this by providing for specific statutory events that result in dissociation.  ULPA further clarifies that a limited partner may not voluntarily dissociate.  Statutory dissociation under ULPA may be varied by the partnership agreement, so this change only shifts the rule in the absence of an existing agreement governing dissociation. 

Practical Tip Review Partnership Agreement to Determine Process for Dissociation.  Many partnership agreements describe the rules and process for dissociation, and for those partnerships these changes will have no impact.  Review your existing partnership agreement to see whether this is the case.

General Partners' Duties, Liabilities and Dissociations Change Under ULPA

Partnerships May Elect to Eliminate General Partner Liability for Partnership Obligations.  Under ULPA, a limited partnership may form as a limited liability limited partnership by stating so in the certificate of limited partnership.  This administrative step protects all partners from liability.  Failure to select limited liability limited partnership status means that general partners have full liability for the obligations of the partnership.  By comparison, under RULPA, general partners were inescapably liable for liabilities of the partnership.  As a result, the general partner was often an entity with limited liability protection.  Because this structure was common, the effect of the elimination of general partner liability under ULPA is to provide a straightforward statutory option for what previously occurred in practice through additional entity formation.

Fiduciary Duties of General Partners Align With Those of Partners in Other Types of Partnerships.  Under ULPA, general partners are subject to fiduciary duties of loyalty and care.  The duty of loyalty requires that a general partner account to the partnership for property, profits, and benefits derived in the conduct of the limited partnership, including appropriated opportunities, and refrain from dealing adversely or competing with the partnership.  The duty of care prohibits general partners from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.  These duties mirror the duties of partners in partnerships governed under Washington's Revised Uniform Partnership Act, which governs general partnerships.  The partnership agreement may, within limits, modify these duties.

General Partners Face Expanded Liability for Wrongful Dissociation.  Under RULPA, a general partner that withdrew in violation of the partnership agreement was liable to the partnership for any damages.  ULPA expands the class of wrongful dissociations that result in a general partner's liability to the partnership.  Under ULPA, a dissociation is wrongful if it occurs prior to termination of the partnership and (i) is by express will, (ii) occurs by judicial determination or (iii) is due to bankruptcy or other debtor actions resulting in dissociation under ULPA.  Breach of the partnership agreement remains a wrongful dissociation as well.

Dissociation of General Partner Is Less Likely to Dissolve Partnership.  Under ULPA, the dissociation of a general partner no longer automatically dissolves the partnership if a general partner remains, or a majority (decreased from two-thirds) of limited partners agree to a new general partner.

Dissociated Partners Are Entitled to Economic Distributions, Not Fair Market Value Payout

Under ULPA, a dissociated partner becomes a transferee of his or her own transferable interest, meaning that he or she maintains the right to receive distributions, but loses other interests associated with the partnership.  This modifies RULPA, which provided that dissociated partners received payout of the fair value of their interest.  Both ULPA and RULPA allow the partnership agreement to vary entitlement to distributions, so the change only affects the statutory default. 

Default Dissolution Provisions Are Changed

A Vote of General Partners and a Majority in Interest of Limited Partners Triggers Dissolution.  ULPA relaxes the consent requirements for dissolution.  Under ULPA, voluntary dissolution requires the consent of all general partners and those limited partners holding a majority of rights to receive distributions.  RULPA formally required unanimous written consent of all partners, but also allowed dissolution upon events specified in the partnership agreement.

Limited Partners May Prevent  Dissolution Upon General Partner Dissociation by Vote of a Majority in Interest.  Under ULPA, a partnership dissolves within 90 days if no general partner remains, unless the limited partners owning a majority of rights to receive distributions agree to continue and admit at least one new general partner.  This slightly modifies RULPA, which required the consent of two-thirds of the limited partner interests, measured by contributions made, to appoint a replacement general partner and prevent dissolution.  The consent threshold under RULPA was subject to variation by the partnership agreement, and therefore the change under ULPA merely changes the statutory default.

Conversion Simplifies Changing an Entity From or to a Limited Partnership

ULPA allows a limited partnership to convert into a different entity and another entity to convert into a limited partnership (within or outside Washington) by filing a plan of conversion, unanimously approved by the partners, with the Washington Secretary of State.  RULPA did not address conversions, and accordingly, an entity change required the formation of a new entity and a merger.

Practical Tips Form as a Limited Liability Limited Partnership.  The option to form as a limited liability limited partnership protects the general partner from the actions of the limited partnership.  With this new option, we highly recommend that limited partnerships consider electing limited liability status on formation to help shield all partners against outside liability. Conversions May Make Limited Partnerships More Desirable.  Conversions can save legal and administrative costs if it becomes necessary or desirable to change the business entity to or from a limited partnership.  Most new ventures today form as corporations or limited liability companies.  While ULPA likely will not change that trend, it offers one significant advantage over present Washington limited liability company and corporate law in that it provides for a simplified conversion into a corporation or limited liability company without a more costly merger or asset transfer. Think Carefully About Whether Your Partnership Agreement Should Rely on Statutory Presumptions.  The changes in statutory presumptions generally mirror how partnership agreements varied from prior statutory defaults.  Nevertheless, it remains important to carefully consider the interests of all partners and the underlying business objectives in determining the most appropriate partnership agreement relating to dissociation, dissolution, and distributions. Increased Liability Protection Does Not Eliminate All Potential Liability.  While the provisions that increase protection against liability help shield partners, they do not eliminate potential liability associated with piercing the partnership veil when the partners disregard the formal boundaries of a partnership.  In addition, partners may face potential liability for breaches of fiduciary duties.  Therefore, partners need to continue to exercise their duties diligently and respect the partnership as a separate entity. Existing Limited Partnerships—Consider Amending Your Partnership Agreements in Light of the Changes and New Provisions Under ULPA: Elect Limited Liability Limited Partnership Status.  Consider whether to amend your partnership agreement and certificate of limited partnership to elect limited liability limited partnership status, thereby protecting your general partners against the obligations of the partnership. Amend Dissolution Provisions.  Consider whether to update your partnership agreement's dissolution provision consistent with the more permissive provisions of ULPA so that the dissociation of a general partner does not automatically dissolve a partnership in cases where ULPA permits the partnership to remain in existence. Conduct a General Review.  As with any change to applicable partnership law, the partners should review the partnership agreement more generally to verify that it reflects the desired provisions now possible or provided for under ULPA.

 Additional Information

This Update is only intended to provide a summary of the amendments to Washington's Limited Liability Company Act.  You can find discussions of other recent cases, laws, regulations, and rule proposals of interest to public companies on our Website.

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