Fiduciary duty considerations in choosing between limited partnerships and limited liability companies

Real Property, Probate and Trust Journal, Spring 2001 by Jacobson, Kenneth M

Editors' Synopsis: This Article compares the fiduciary duties imposed upon the general and limited partners of a limited partnership and the managers and members of a limited liability company under the most recent revisions to the uniform acts which govern these entities. It also outlines the differences between the uniform acts and their Delaware counterparts. It provides a summary of the extent to which these duties can be abrogated by agreement and includes sample forms of agreements modifying the duties in order to accommodate specific goals of the parties organizing the entity.

I. INTRODUCTION

II. ANALYSIS OF DISTINCTIONS REGARDING FIDUCIARY DUTIES OF LIMITED PARTNERSHIPS AND LIMITED LIABILITY COMPANIES

A The Limited Partnership

1. What Fiduciary Duties are Imposed on the General Partners and Limited Partners in an LP?

a. Duties of a General Partner

b. Duties of a Limited Partner

2. Who Owes Fiduciary Duties in an LP?

3. May Fiduciary Duties be Waived, Limited, or Eliminated by Agreement Among Parties with Respect to an LP?

B. Limited Liability Companies

1. What Fiduciary Duties are Imposed on the Managers and Members of an LLC?

2. Who Owes Fiduciary Duties in an LLC?

3. May Fiduciary Duties be Waived, Limited, or Eliminated by Agreement Among the Parties with Respect to an LLC?

C. LP and LLC Compared

1. What Fiduciary Duties are Imposed on the Owners and Managers of Each Form of Entity?

2. Who Owes Fiduciary Duties with Respect to Each Form of Entity?

3. May Fiduciary Duties be Waived, Limited, or Eliminated by Agreement Among the Parties with Respect to Each Form of Entity?

III.CONCLUSION

EXHIBIT A. SAMPLE FORM SPECIFYING THAT PARTNERS MAY ACT IN THEIR OWN BEST INTEREST

EXHIBIT B. SAMPLE FORM MODIFYING DUTY OF LOYALTY INCLUDING PROVISIONS FOR CREATION OF ADVISORY COMMITTEE TO APPROVE GENERAL PARTNER FIDUCIARY DUTY WAIVERS

EXHIBIT C. SAMPLE FORM ADDRESSING DUTY OF LOYALTY AND ADVISORY BOARD

EXHIBIT D. SAMPLE FORM FOR WAIVER OF FIDUCIARY DUTY

I. INTRODUCTION

Many real estate attorneys consider the limited partnership ("LP") or the limited liability company ("LLC") as today's investment vehicle of choice for ownership of real estate.1 Each form of entity provides for limited personal liability, although the LLC limits the personal liability of all of its owners, while an LP limits the personal liability of only its limited partners.2 Additionally, under the check-the-box rules found in Treasury Regulation sections 301.7701-2 and 301.7701-3, an LP or an LLC is classified as a partnership by default if it has two or more owners, or is disregarded as an entity separate from its owner if it has a single owner.3 Default treatment of most LPs and LLCs as partnerships for tax purposes has eliminated the possible double taxation of such entities and owners of a U.S. income tax planning concern. Accordingly, in choosing between an LP or an LLC, issues other than limited personal liability and taxation are of primary concern.

One issue that may influence the choice between an LP and an LLC is that of fiduciary duties. This Article compares the fiduciary duties imposed on the owners and managers of LPs and LLCs and explores the extent to which fiduciary duty considerations should affect the choice between the two entities, assuming all other considerations are equal. Fiduciary duty considerations will be analyzed by addressing the following questions:

1. What fiduciary duties are imposed on the owners and managers of each form of entity?

2. Who owes fiduciary duties in each form of entity?

3. May fiduciary duties be waived, limited, or eliminated by agreement among the parties for each form of entity?

In reviewing fiduciary duties in the context of LPs, this Article considers the Revised Uniform Limited Partnership Act of 1976 with its 1985 amendments ("RULPA"),4 the Delaware Revised Uniform Limited Partnership Act ("DRULPA"),5 and the August 2000 Annual Meeting Discussion Draft of the Revision of the Uniform Limited Partnership Act of 1976 with its 1985 Amendments ("Re-RULPA").6 In reviewing fiduciary duties imposed on general partners in a limited partnership, this Article also considers the Uniform Partnership Act of 1997 ("RUPA")7 and the Uniform Partnership Act of 1914 ("UPA").8 In reviewing fiduciary duties, in the context of LLCs, this Article considers the Uniform Limited Liability Company Act of 1995 ("ULLCA")9 and the Delaware Limited Liability Company Act ("DLLCA").10

As the discussion below indicates, the duties of fiduciaries and the ability to waive, limit, or modify them differ between Delaware limited partnerships and Delaware LLCs. Outside the Delaware context, distinctions may arise in a fiduciary duty analysis between limited partnerships and LLCs based on whether the limited partnership is organized in a jurisdiction that has not adopted RUPA. One would expect that this difference will recede as additional jurisdictions adopt RUPA. Limited partnerships have been in existence longer than LLCs and have a "greater judicial track record" that may provide guidance to future courts and practitioners. However, with the development of non-corporate limited liability entities such as limited partnerships, limited liability partnerships, limited liability limited partnerships, and LLCs, each designed (in one form or another) to insulate ownership from liabilities of the business enterprise, no logical policy reason exists for distinguishing among such forms of entities with regard to fiduciary duties.11