Friday, May 27, 2011

Little Known Facts: The Zero Percent General Partner

One often sees general partnerships in which the general partner owns 1% or even 0.1% of the limited partnership.  But may the general partner of a Texas limited partnership own 0% of the limited partnership?

Yes.  Section 153.151(d) of the Texas Business Organizations Code, adopted effective 2006, provides that:  “A written partnership agreement may provide that a person may be admitted as a general partner in a limited partnership, including as the sole general partner, without acquiring a partnership interest in the limited partnership.” 

Every general partnership must have at least one general partner.  The general partner is generally responsible for managing the limited partnership and faces unlimited liability for the debts of the limited partnership if the limited partnership is unable to pay its debts.

So why would a person agree to serve as a 0% general partner – getting all of the downside but none of the upside of the limited partnership?  Typically a 0% general partner is also an affiliate of one or more of the limited partners who do enjoy part or all of the upside of the partnership. 

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