When the concept of a limited partnership was first developed, one of the principal goals was to create a business structure whereby people can invest in a business without the right to control many of the aspects of the business in exchange for limited liability.
In Arizona, when does a limited partner face potential liability to third parties because s/he has exercised too much control? Arizona's Statutes, A.R.S. § 29-139, provide the following in regard to limited partner liability to third parties:
A. Except as provided in subsection D of this section, a limited partner is not liable for the obligations of a limited partnership unless he is also a general partner or, in addition to the exercise of his rights and powers as a limited partner, he participates in the control of the business. However, if the limited partner participates in the control of the business, he is liable only to persons who transact business with the limited partnership reasonably believing, based on the limited partner's conduct, that the limited partner is a general partner.
B. A limited partner does not participate in the control of the business within the meaning of subsection A of this section solely by doing one or more of the following:
1. Being a contractor for or an agent or employee of the limited partnership or of a general partner or being an officer, director or shareholder of a general partner that is a corporation or being a manager or member of a general partner that is a limited liability company;
2. Consulting with and advising a general partner with respect to the business of the limited partnership;
3. Acting as surety for the limited partnership or guaranteeing or assuming one or more specific obligations of the limited partnership;
4. Taking any action required or permitted by law to bring or pursue a derivative action in the right of a limited partnership;
5. Requesting or attending a meeting of partners;
6. Proposing, approving or disapproving, by voting or otherwise, one or more of the following matters:
(a) The dissolution and winding up of the limited partnership;
(b) The sale, exchange, lease, mortgage, pledge or other transfer of all or substantially all of the assets of the limited partnership;
(c) The incurrence of indebtedness by the limited partnership other than in the ordinary course of its business;
(d) A change in the nature of the business;
(e) The admission or removal of a general partner;
(f) The admission or removal of a limited partner;
(g) A transaction involving an actual or potential conflict of interest between a general partner and the limited partnership or the limited partners;
(h) An amendment to the partnership agreement or certificate of limited partnership; or
(i) Matters related to the business of the limited partnership not otherwise enumerated in this subsection, which the partnership agreement states in writing may be subject to the approval or disapproval of limited partners;
7. Winding up the limited partnership pursuant to section 29-346; or
8. Exercising any right or power permitted to limited partners under this chapter and not specifically enumerated in this subsection.
C. The enumeration in subsection B of this section does not mean that the possession or exercise of any other powers by a limited partner constitutes participation by him in the business of the limited partnership.
D. A limited partner who knowingly permits his name to be used in the name of the limited partnership, except under circumstances permitted by section 29-302, paragraph 2 is liable to creditors who extend credit to the limited partnership without actual knowledge that the limited partner is not a general partner.
This brief post is by no means comprehensive. Always seek the advice of a competent professional when making important legal decisions.