Unfortunately, when one person is given most of the control in an organization, like general partners (GPs) of a limited partnership, it presents an inviting opportunity for fraud or otherwise mismanaging the business. Limited partners (LPs) in partnerships like this should be able to recognize the signs that something is off.
LPs don’t participate in running or managing a partnership. In fact, if they do participate in management decisions, they lose their LP status. Although LPs nominally have the power to vote to remove GPs, the partnership structure usually makes removal virtually impossible — unless the GP in question has committed fraud.
GPs alone are subject to claims, debts in bankruptcy and lawsuits against the partnership. Potential losses for LPs, by contrast, are limited to their capital contributions. However, because your capital is at stake, you need to ensure that the GP’s reputation and record are stellar before you sign any partnership agreement.
Signs of self-enrichment
If you’re already a limited partner, keep an eye out for shady activities. Because GPs have almost complete control of the partnership, it’s possible for them to enrich themselves at the business’s — and your — expense. For example, instead of simply drawing one fee for managing the limited partnership, a GP might fraudulently claim that he or she provided additional services and arrange additional pay for those services.
Although such activities usually leave a paper trail, other types of fraud can be harder to detect. For example, a GP might control or own another company that provides goods or services to the partnership at inflated rates. The GP sets prices as head of the supplying company and approves payment of those prices (however unreasonable) as head of the limited partnership. Such self-dealing takes its toll on the partnership’s profitability.
If you suspect GP fraud, look into whether your GP provides any goods or services, either directly or indirectly, to the business. If so, how much is the partnership paying for those goods or services? Are they in line with market-rate prices and are the transactions at arm’s length?
It’s important to contact a professional if you think something’s amiss. If you have questions or want someone to review your GP’s decisions and analyze the partnership’s financial records, JLK Rosenberger can help. For more information, call us at 949-860-9902 or click here to contact us.