Final answer:
A limited partner in a RULPA-based partnership faces liability as a general partner if they significantly control the business, which puts their personal assets at risk in the event of business debts or a lawsuit. They must maintain a strictly passive role to keep their limited liability protection.
Step-by-step explanation:
Under the Revised Uniform Limited Partnership Act (RULPA), a limited partner is liable as a general partner if the partner's participation in the control of the business is substantial and not just limited to the investment. A limited partner typically invests in the partnership but does not have any managerial control over the daily operations, which allows them to enjoy limited liability protection. In contrast, general partners manage the business and are personally liable for the partnership's debts. If a limited partner oversteps this boundary, becoming significantly involved in management decisions, they risk losing their liability shield and could be exposed to the debts and obligations of the partnership as a general partner would be.
It is crucial for limited partners to avoid engaging in activities that would make them appear as though they are controlling the business to maintain their limited liability status. Among the general partnership disadvantages, the most significant is the personal liability for all business debts. This personal liability can lead to owners losing personal assets like their home, car, or personal bank accounts in the event of bankruptcy or lawsuit.