Here’s a disturbing thought: imagine that you’re a limited partner in an entity that’s a limited partnership. By definition, you’re liabilities are supposed to be limited — that’s why you’re a limited partner. It’s the “general partner” who’s usually left holding the bag when it comes to claims and liabilities of the limited partnership.
But it seems that courts may look beyond your title to get into your pockets — if this bankruptcy court case noted by law professor Larry Ribstein is any sign of a trend. In In re Adelphia Communications Corp., 376 B.R. 87 (Bkrtcy.S.D.N.Y., 2007), the Bankruptcy Court was not swayed by the limited partner’s argument that the plaintiff creditor (who was suing the limited partner for $45 million) actually knew that the limited partner was a limited partner. Rather, the court took a broader view of the statute to look at the limited partner’s conduct — not just its status.
So what does this mean in the real world? It means that you should get careful advice about your duties, responsibilities, and liabilities before becoming an owner of a business. Laws change — and even when they don’t, courts can change their interpretations. Learn what’s expected of you. Find out from a knowledgeable attorney what the danger zones are that could open you up to personal liability.