Yes it is. Limited partnership interests are protected from creditors because they are a poisoned asset. A creditor does not want to go after such an interest because all they would receive is an assignee interest. Such an interest has no control in the limited partnership. The general partner controls the whole entity.

A limited partnership provides asset protection from potential creditors of a partner because such partner’s creditor generally cannot seize the partnership interest and become a partner of the limited partnership. Instead, the creditor will typically receive a charging order against the partnership which will give the creditor the right of an assignee in the partnership which means nothing but trouble for the creditor. A creditor doesn’t want an assignee interest because the general partner of the limited partnership can withhold distributions so that the creditor will receive a K-1 tax form showing the creditor has income from the partnership that it has to pay income tax on but the creditor will not receive the funds to pay the tax due to the general partner withholding the distributions in the partnership.

A creditor, as an assignee, receives only the right to inspect the books of a partnership. The creditor will not have any voting rights, control or other power in the partnership. The creditor cannot force the partnership to sell any assets, liquidate or make a distribution to satisfy any debts. This status of the creditor makes a limited partnership interest a poisoned asset to a creditor.

In order for an interest in a limited partnership to have success against a creditor trying to take such an interest, the partnership must have an Agreement between all the partners which outlines the rights and responsibilities of the partners in the partnership. This Agreement will describe, among other things, the limitations on the transferability of interests, the actions which will require the votes of the limited partners, and information on how the partnership will be conducted.

In a litigation action, a creditor might try to make a claim that a transfer to a limited partnership was done to defraud the creditor in violation of the fraudulent conveyance act in the State of Texas. However, as long as transfers to a limited partnership are not made with an actual intent to hinder, delay, or defraud creditors, the transfer should not be voidable and it should be upheld as valid. Therefore, an individual forming a limited partnership should retain sufficient assets outside the entity to enable the individual to satisfy any outstanding debts and claims, and to satisfy any reasonably anticipated future debts and claims from litigation actions.

In order to maintain the separate entity status of the limited partnership from the partners, the partners must respect the business form of the partnership. The partners cannot pay personal expenses directly from the partnership accounts. Additionally, when a partner prepares a personal financial statement for a lender, the partner must not list the partnership’s assets as the partner’s own. The partner must only list the partnership interest which the partner owns. If the partner lists the assets or pays his or her own personal expenses from the partnership account, these actions can open the door to claims by third parties such as creditors or the IRS that the limited partnership is just a sham and an alter ego of the partner. This will result in the assets in the partnership being subject to the claims of the third parties.

The difference between a limited partnership interest and a general partnership interest is quite substantial. The main difference is that a limited partner enjoys limited liability with the debts of the partnership while a general partner is personally liable for such debts if the partnership assets are insufficient to pay the same.

A limited partner is entitled to share in the partnership profit distributions on a pro rata basis. If the limited partnership is liquidated, the limited partner is entitled to his or her pro rata share of the liquidation proceeds. Limited partners are not personally liable for any liabilities incurred in the partnership, and they do not share in the management of the limited partnership. They cannot vote on whether to invest in or sell a particular asset nor can they vote, individually, to liquidate the partnership. A limited partner is subject to the control and discretion of the general partner and a limited partner cannot force a general partner to make a distribution from the partnership. This is the main reason why creditors do not like limited partnership interests.

A general partner in a limited partnership is entitled to a share of the partnership profits based on the general partner’s percentage ownership in the partnership. Additionally, the general partner has complete management, authority and control over the partnership and its assets. This includes the power to decide if and when a distribution of partnership profits will occur. A general partner will receive compensation for performing these management duties. However, with the power to control everything comes the impact of full liability. A general partner is personally liable for partnership liabilities that are not paid out of partnership interests. Therefore, if a general partner makes a bad decision that involves a huge liability and the partnership does not have sufficient assets to cover the liability, then the general partner will personally be liable for the payment of the liability out of the general partner’s own pocket. For this reason, with a high liability asset placed inside a limited partnership, we recommend that a client form a limited liability company to act as the general partner of a limited partnership. This entity will provide a shield in the event an action of personal liability arises on the part of the general partner as long as this entity is sufficiently funded with starting capital and a liability policy.