To understand the Limited Partnership Agreement, one must first understand the limited partnership. Similar to the general partnership, the limited partnership consists of one or more general partners and one or more limited partners. The general partners act as would be expected. On the positive side, they manage and control the partnership, share in its profits, use its property, and have authority to bind the other general partners. On the negative side, they are all jointly and severally liable for the debts and obligations of the partnership.

Add to this the limited partners who are, as their name suggests, limited in what they can and cannot do. Limited partners can share in the profits, receiving dividends of sorts. They also can avoid the joint and several liability for the partnership’s debts. They cannot, however, bind the partnership, nor do they have management control-usually. But they can sit on the board of directors without being deemed to have management control. Lastly, they are obliged by statute to disclose their status as limited partners to the public, lest unwitting persons think otherwise.

It happens sometimes that limited partners can have management control and the power to bind the partnership, and this leads into the main distinctions between general partnerships and limited partnerships. First, limited partnerships are created not by the intention of the parties but by statute, by filing registration papers with the state. Second, the parties may decide to override the Limited Partnership Agreement by actually endowing the limited parties with rights that they would not normally enjoy. And third, so long as the limited partnership observes certain rules related to limited liability, centralized management, duration, and transferability of ownership, it will benefit from pass-through taxation. Otherwise, it will be taxed like a corporation.

Limited partnerships are also distinguished from limited liability partnerships. In the latter case, all the partners have limited liability. In the former case, only the limited partners have limited liability; the general partners are still on the hook. To address this hazard, the limited partnership may be set up such that the general partner is actually a corporation or LLC.

Limited partnership Agreements have a number of essential clauses. Because the agreements govern the partnership, it is important for them to be clear and complete. They should address the issues of control and authority-may limited partners manage or bind the partnership? They should also deal the purpose of the partnership, its duration and termination; possible assignment of partnership interests (which are regarded as securities by law; the other partners have right of first refusal, too, where a partner is trying to assign the interest); and money-how to split the profits, how they will be taxed, and how to divide the partnership’s debts.

Limited Partnership Agreements are most commonly found in the real estate and entertainment (film) industries, where projects (like constructing a building or making a movie) are of a finite duration and where the duties can be neatly separated. That is, in these situations, the general partners make the investment and control the project, and the limited partners provide the labor and the know-how. All, however, enjoy in the profits-at least theoretically.

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Companies design Equity Incentive Plans (”Plans”) to provide key, upper-level employees an equity interest in the company. The purpose of these plans is to motivate these employees to perform their best tie these employees’ financial futures to the stock price of the company. As any transactional attorney knows, often the “Definitions” section of an Incentive Plan is the most important part. How key terms are defined make all the difference in applying the plan to the employees. This article will take a look at the key terms generally found in Equity Incentive Plans and will define these terms, hopefully assisting drafters who may be unfamiliar with some of them.

The following terms are generally found in Equity Incentive Agreements and are defined as such:

“Affiliate” - Affiliate generally means any corporation in an unbroken chain of corporations ending with the company, other than the company that owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the corporations in such chain.

“Board” - Refers to the Board of Directors of the Company

“Change in Control” - Defining this term is very important to the substance of the agreement and doing it properly generally takes several pages. A change of control of the company can occur in a number of ways: (a) if any person becomes the owner of securities of the Company representing more than 50% of the combined voting power of the company’s outstanding securities other than by virtue of a merger, consolidation, or similar transaction; (b) a merger, consolidation, or similar transaction involving the company whereby the merger or consolidation results in another company owning more than 50% of the combined voting power of the surviving entity; (c) the stockholders or Board approve a plan of sale, complete dissolution or liquidation of the Company; or (d) the individuals on the Board at the time the Plan is approved cease to constitute at least a majority of the members on the Board.

“Code” - refers to the latest adopted Internal Revenue code.

“Continuous Service” - means that the participant’s service with the Company, whether as an employee, director, or consultant is not interrupted or terminated.

“Fair Market Value” - refers to the price of the stock, as is defined as the closing sales price for the company’s stock as quoted on the appropriate exchange, as reported in The Wall Street Journal.

“Incentive Stock Option” - means an option intended to qualify as an incentive stock option within the meaning of Section 422 of the IRS Code.

“Option Agreement” - is generally defined as a written agreement between the Company and an Optionholder evidencing the terms and conditions of an option grant.

“Optionholder” - means a person to whom an option is granted pursuant to the plan.

“Participant” - means a person to whom a stock award is granted pursuant to the Plan.

“Performance Goals” - means the one or more goals established by the Board of Directors for the Performance Period based upon the Performance Criteria

“Stock Award” - means any right granted under the Plan, including an Option, a Stock Purchase Award, Stock Bonus Award, Stock Appreciation Right, or any other Stock Award.

These are the definitions for the most common terms found in Equity Incentive Plans. Before adopting one of the above-mentioned definition, be sure to consult the Board of Directors or Plan Administration Committee of your client to ensure correct usage.

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