One of the primary purposes of a written partnership (or limited liability company (LLC) operating) agreement is to establish rights and obligations for management. In a general partnership or joint venture, any partner or joint venturer is authorized by statute to participate in management and to bind the partnership vis-à-vis third parties. In a limited partnership, only a general partner is authorized to act for the limited partnership; a limited partner could act for the limited partnership, but it could be held liable as a general partner (with full secondary liability for partnership obligations), so that is a rare occurrence. In an LLC, structural management rights depend in part upon the state; some states require that the certificate of formation designate whether the LLC is governed by members or managers, while other states (e.g., Delaware) do not require such information in the filed certificate.
Notwithstanding the general rules, most rights and authority can, and should, be spelled out by contractual agreement. In a general partnership, one partner is typically designated as the managing general partner, and the other partners are restricted in their contractual authority (although third parties without knowledge of such restrictions may still rely upon the statement of such other partners). This structure works like a limited partnership, but requires that the partnership agreement spell out the rights (and any restrictions) of the managing general partner. While partners can authorize multiple managing partners, with similar or different rights and responsibilities, granting more than one partner with operating authority requires extremely tight coordination.
In a limited partnership, management is vested by statute in the general partner(s); this statutory restriction on limited partner authority is a reason that the limited partnership form remains a popular form of entity. If there is more than one general partner, then management rights and restrictions should be delineated as if it were a general partnership. However, there remain several common pitfalls. The general partner (or its members, officers or other governing persons) may also be a limited partner, although the sole general partner cannot be the sole limited partner. Therefore, explicitness in identifying capacities is vital; stating generally that a limited partner has no authority may not be correct if that person also controls the general partner, and it may raise inappropriate and unnecessary hurdles regarding authority to third parties (i.e., lenders) who have knowledge of the partnership agreement. Further, a limited partner may also be an officer (see more on this below) with authority to act on behalf of the partnership, so the limitation again is not correct. A partnership agreement should say “a limited partner, acting in that capacity, may not bind the partnership.” Finally, most limited-partner statutes permit the limited partners to vote on specific matters, including anything set forth in the partnership agreement; through this mechanism, limited partners can have substantial control over the activities of a limited partnership without liability, although provisions requiring the general partner to act in accordance with the specific votes of the limited partners should be included.
In an LLC, the agreement may structure the LLC to look like a corporation or to look like a partnership, or to be somewhere in the spectrum between those two forms. Managers (often designated as “directors”) may be vested with authority, whether as a board or individually, but the operating agreement can also grant significant authority to the members, who retain their limited liability while acting in such capacity (unlike in a partnership or limited partnership form). Major decisions can be made by a board of managers, and day-to-day operations may be the responsibility of a managing member or officers. Directors/managers also can be, in effect, executive officers charged with day-to-day management. The breadth of arrangements permitted in an LLC’s operating agreement requires consideration and drafting, but enables members and managers to arrange management rights and responsibilities exactly as the parties desire without statutory limitations on structure. A primary consideration, which requires explicit drafting, is whether managers serve in a fiduciary capacity or whether they are mere representatives of the members who appoint them (in which, case fiduciary duties of managers, but not the parties responsible for day-to-day activities should be eliminated).
Both LLCs and partnerships (general and limited) can have officers for purposes of running business operations. Statutes such as Delaware’s entity laws specifically contemplate officers; other statutes do not, so they would be appointed in the capacity of an agent (with a more specific title). It is customary for partnership agreements and operating agreements to shorthand the rights and authority of officers by granting authority to be the same as that of a corporate office with the same title, even though such authority is not statutory but is typically found in corporate bylaws. For certainty, those same descriptions of offices can be included in the partnership or operating agreement. Further, many provisions unthinkingly provide that officers (and managers) will serve for terms; corporate statutes typically require such limitations, but partnerships and LLCs do not, so the appointment of managers/directors and officers should last until their death, removal or resignation to avoid unnecessary formalities. Officers should also be expressly covered by exculpation and indemnification provisions.
It is common for investment funds and other entities, whether in the form of an LLC or limited partnership, to have boards of advisors or otherwise provide for consultation with non-managing equity owners. These are sometimes structured to be advisors to a general partner or are granted certain approval rights, notwithstanding the label of “advisor”. The partnership or operating agreement should be explicit in granting authority, if any, or disclaiming authority, as is more customary. Because such advisors could have a material impact on governance decisions, they should be included in exculpation and indemnification provisions, even if they are only representatives of the limited partners who select such advisors.
Finally, the federal tax law regarding self-employment tax is not settled. Consequently, a limited partner or non-managing member who nonetheless actively participates in the management and governance of an entity can find himself or herself subject to self-employment tax obligations.