If you are a general partner of a limited partnership that is either conducting any substantial business or taking investors, you had better do your asset protection planning first.
Personal asset protection is a major motivator behind creating a business entity through which to conduct business activities. For certain entities that means the protection of a corporate veil, but others are less safe.
On that note, a recent Forbes article titled “Miske: The Innocent General Partner Tagged With Liability For Losses Due To Misdeeds Of Another General Partner,” provides a word of caution when it comes limited partnerships via the case of Miske v. Bisno. In that particular case, one general partner in a limited partnership engaged in unwholesome activities, including embezzlement. Naturally, the embezzlement was discovered and led to a loss.
A limited partner then sued an entirely different general partner for the losses. The innocent general partner protested, arguing that he knew he was liable to third parties (which is bad enough), but not to limited partners in the same way. Unfortunately, the court didn’t agree, ruling that it doesn’t matter whether the suit is third-party or internal since a general partner is liable for the entity of which he or she is a general partner. As stated in the original article, “general partner” is just another way of saying “generally liable.” Now imagine that one general partner is husband and the other general partner is wife. What happens to their personal asset protection? Ouch!
When choosing and using an entity to protect your assets and your individual liability, be sure to consult competent legal counsel to help you navigate the land mines.
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Reference: Forbes (May 25, 2012) “Miske: The Innocent General Partner Tagged With Liability For Losses Due To Misdeeds Of Another General Partner”