Fiduciary Duty Considerations In Choosing Between Limited Partnerships and Limited Liability Companies© By Kenneth M. Jacobson Katten Muchin Zavis Chicago, Illinois1/

Introduction Many real estate attorneys would consider the limited partnership or the limited liability company (“LLC”) as the investment vehicle of choice today for ownership of real estate.2/ Each form of entity provides for limited personal liability for liabilities of the entity for all of its owners in the case of a LLC and for some of its owners in the case of limited partners in a limited partnership.3/ In addition, under the check-the-box rules found in the check-the-box regulations at Treasury Regulation Sections 301.7701-2 and 301.7701-3, limited partnerships and LLCs will be classified as partnerships by “default” if the entity in question has two or more owners or is disregarded as an entity separate from its owner if it has a single owner.4/ Such treatment as a partnership eliminates the U.S. income tax planning concern for possible double taxation of the entity and its owners. Accordingly, non-personal liability and non-tax concerns will have a significant influence on the choice between the two forms of entities. One possible area of concern that may influence the choice of entity is the application of fiduciary duty analysis. To what extent do the two forms of entity differ with regard to the application of 1/

This paper is based on a paper presented by the author for a workshop presentation at the Mid-Year 2000 meeting of the American College of Real Estate Lawyers. Nothing contained in this paper shall be construed as legal, tax or accounting advice. The author reserves the right to assert positions contrary to those stated in this paper.

2/

The registered limited liability partnership or limited liability limited partnership provide other alternatives, but are not addressed in this paper. The limited liability partnership is a general partnership that provides limited liability for its partners. See, e.g., Del. Code Ann. tit. 6 §15-306(b). See generally, Alan R. Bromberg and Larry E. Ribstein, Bromberg and Ribstein on Limited Liability Partnerships and the Revised Uniform Partnership Act (1998). However, not every jurisdiction provides the same type of limited liability for its partners. Compare Delaware [Del. Code Ann. tit. 6 §15-306(b) (limited liability for contract and tort matters)] to Illinois [805 ILCS 205/15 (limited liability for matters arising out of negligence, wrongful acts, omissions, misconduct or malpractice). A limited liability limited partnership also provides limited liability for both general partners and limited partners. See, e.g., Del. Code Ann. tit. 6 §17-214(c). However, inasmuch as limited liability partnerships are general partnerships having taken an additional step of registering or other appropriate action to obtain such status and limited liability limited partnerships are limited partnerships having taken appropriate action to obtain the status of limited liability limited partnership, the discussion in this paper on fiduciary duties for limited partnerships has some applicability.

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See, e.g., 805 ILCS 180/10-10 (LLC members) and 805 ILCS 210/303 (limited partnership limited partners).

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Kenneth M. Jacobson, Howard M. Richard and Sheldon I. Banoff, Illinois Limited Liability Company Forms and Practice Manual 1-17 (1999).

©Copyright 2000. Kenneth M. Jacobson Doc #:CH01 (99000-03978) 20703004v2;08/30/2000/Time:14:09

fiduciary duties and the ability to waive, limit or modify fiduciary duties? To what extent will fiduciary duty considerations affect the choice of entity assuming all other considerations are equal? In this regard, this paper will compare the two types of entities for fiduciary duties by analysis of the following issues: 1.

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

2.

Who owes fiduciary duties for each form of entity?

3.

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

In answering the three questions posed above, this paper will consider the application of the Revised Uniform Limited Partnership Act (1976) with the 1985 amendments (RULPA”),5/ the Delaware Revised Uniform Limited Partnership Act (“DRULPA”)6/, and the August 2000 Annual Meeting Discussion Draft of the Revision of the Uniform Limited Partnership Act (1976) with 1985 Amendments (hereinafter “Re-RULPA”)7/ for analysis of fiduciary duties as they pertain to limited partnerships. In reviewing fiduciary duties imposed on general partners in a limited partnership, this paper also considers the Uniform Partnership Act (1997) (“RUPA”)8/ and the Uniform Partnership Act (1914) (hereinafter, “UPA”)9/. In reviewing fiduciary duties that pertain to a LLC consideration will be given to the Uniform Limited Liability Company Act (1995) (hereinafter “ULLCA”)10/ and the Delaware Limited Liability Company Act (hereinafter “DLLCA”)11/ As the discussion below indicates, there are differences in fiduciary duties and the ability to waive, limit or modify fiduciary duties between Delaware limited partnerships and Delaware LLCs. Outside of the Delaware context, there may be distinctions for 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 around much longer than LLCs and have a “greater judicial track record” that might 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 5/

Rev. Unif. Ltd. Part. Act §101 et seq.

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Del. Code Ann. tit. 6, §17-101 et seq.

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Rev. Unif. Ltd. Part. Act (August 2000 Annual Meeting Discussion Draft §101 et seq. (available at