Understanding the Difference Between a General Partnership and Limited Partnerships in New Jersey
There is a difference between a NJ General Partnership and a New Jersey Limited Partnership. Let me explain those differences on this page.
Limited Legal Liability in a New Jersey Limited Partnership
You may be interested in getting involved in a New Jersey business but are afraid of exposure to lawsuits, of being sued personally and having a judgment entered against you. Besides not getting involved at all, what are your options? Individuals in New Jersey who want to be a part of a business enterprise can shield and protect themselves from general legal liability by becoming a limited liability (LLP) partner in a limited liability partnership. A limited liability partner in a limited liability partnership is not personally liable under New Jersey law for the obligations or the liabilities of the partnership caused by the actions of other partner(s), employee(s), agent(s) or representative(s) of the limited liability partnership. Further, a limited partner in a limited liability partnership will generally not be a named party to a lawsuit against the limited partnership unless it is alleged that this individual is personally liable because of his or her direct participation in the business of the partnership by way of personal supervision or control.
A limited partner in a New Jersey limited partnership is a member who does not involve himself or herself in the active running or day to day management and/or operations of the partnership, and is, therefore, not jointly and severally liable for the actions and decisions made by the general partner. Recently a court in our state decided that a limited partner who was a member of a NJ Limited Liability Company (LLC) and its limited partners could be sued and its member(s) sued personally by “piercing the corporate veil” of the LLC in certain situations if the limited partner dominates the partnership or uses the limited partnership shield to perpetuate a fraud or injustice.
General Partnership Liability in a NJ Limited Partnership
Although limited liability partnerships shield the limited partners from general legal liability, limited partnerships do not shield the general partners of the LLP. There is a big difference between being a limited partner and the general partner.
When Can a General Partner of a Limited Partnership Be Held Personally Liable?
New Jersey has joined a group of states that have decided to allow a plaintiff to pierce the corporate veil of a corporate general partner under certain and limited circumstances. The law also allows legal action to be filed against a limited partner under certain circumstances.
While the prevailing law in this state still holds that a limited partner is shielded from personal liability for partnership obligations, there are two exceptions that can override that immunity: 1. When a limited partner is also the general partner of the partnership or, 2. a limited partner participates in the control of the business as if he was acting like a general partner.
But New Jersey law still retains its “safe harbor protections” that allow a limited partner to engage in certain activities of the partnership without being considered in control of the business. These safe harbor activities include (1) being a passive shareholder or passive member of a LLC general partner; (2) providing consulting or advisory services to a general partner; or (3) being a contractor, agent or employee of the limited partnership.
However, if a court finds that a limited partner “dominates” the partnership or uses the resources of the partnership to commit a fraud or injustice, the immunity from personal liability will be waived. Factors to be considered by a judge in determining whether a partner is “dominating” the partnership include:
- The limited partner’s role in the day-to-day operations of a business
- The limited partner’s decision-making authority compared to that of a general partner
- Capitalization of the entity relative to the nature of the company’s business
Need to better understand your options of becoming a general or limited partner in a NJ partnership? If so, contact me personally today to discuss your partnership matter. I am easy to talk to, very approachable and can offer you practical, legal ways to handle your concerns. You can reach me toll free at (855) 376-5291 or e-mail me at email@example.com.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Partnership Attorney