Filing, Amendment & Advisement
Partnerships are a general category that can encompass several related kinds of entities, ranging from simple informal arrangements to complex ownership and management structures detailed through lengthy partnership agreements.
On the simpler side, a general partnership is the default structure for two or more persons who are operating a business for profit, sharing in profits and losses. As a result, the creation of a general partnership has no filing requirements and requires no written or explicit ownership agreement, although most general partners benefit by having a written agreement.
General partners all participate in the management of the business, but do not have to do so equally nor must profits and losses be shared equally.
However, general partnerships do not provide any sort of liability protection and each general partner is potentially fully liable for the debts and obligations of the partnership. (But, general partners can form a limited liability partnership in order to achieve personal liability protection.)
In any partnership, partners can operate their business together with only an oral agreement or without any explicit agreement at all. When partners operate without an explicit agreement, statutory default rules will operate to fill gaps in the arrangement, specifying the extent of the partners' rights and obligations as well as the conditions for important business events.
In some situations, the default rules may already specify terms that work best for a particular partnership.
But modifications, tailored to the needs of particular businesses, are common. For example, under the default rules, a general partnership is dissolved if any general partner withdraws from the business, whether voluntarily or involuntarily (e.g. by the death or disability of a partner).
The automatic dissolution of the partnership, with its effect on business operations and individual income, is an unwelcome result to many partners. But even if this default rule works for a partnership, prudent partners should nevertheless understand any default rule before letting it govern some of the most important conditions and procedures of their partnership.
Although partners can operate without a written agreement, even for a general partnership, it is generally advisable to prepare a written partnership agreement that addresses the business's specific needs and purposes, describes its structure, and details the rights and obligations of the partners - as owners, managers, and agents of the partnership. Formalizing a partnership agreement upfront can also help partners plan for contingencies, even unpleasant ones, before any such situation arises.
Furthermore, if the general partnership holds real property, the partners will need a written partnership agreement to file in the county where the property is located.
Partners have considerable flexibility when it comes to the terms of their agreement. (For more information, see the page dedicated to partnership agreements.)
While general partnerships do not have filing requirements, any other sort of partnership can be created only by filing the appropriate foundational document with the Secretary of State.
Partnership arrangements other than general partnerships offer liability protection for at least some of the partners, but are created only by making the appropriate filing with the Secretary of State. The partnerships that require filings - (i) limited liability partnerships, (ii) limited partnerships, and (iii) limited liability limited partnerships - allow partners (a) to attain personal liability protection for general partners, (b) to admit limited partners (who are basically investors, protected from personal liability but excluded from management), or (c) both.
Moreover, as with sole proprietorships, general partners who wish to operate a business under a name other than their legal names must register a tradename with the Secretary of State. For more information, please see the section on tradenames.
The Pote Law Firm works with small business owners to help them properly register their business and to draft, review or revise partnership agreements. If you need assistance, please Reach out, Today!
A limited partnership (LP) is a partnership with at least one general partner and at least one limited partner. As in a general partnership, a general partner is involved in the management of the business and has potentially unlimited personal liability for the debts, obligations, and acts of the partnership.
Limited partners, on the other hand, are potentially liable only to the extent of their financial contribution to the business. They are in effect passive investors in the business - and this feature of LPs makes them well suited to raising capital by selling additional limited partnership interests in the business.
But to attain this liability protection, limited partners are precluded from participating in the management of the business – and a limited partner who participates in management risks being treated as a general partner in terms of liability for the business's activities.
As a result, unlike general partnerships, LPs are not an ideal fit for situations where all partners wish to be active in management. Rather, they are a better fit when passive investment is desired.
LPs are formed by filing a Certificate of Limited Partnership with the Secretary of State. This Certificate is short, but significant as the foundational document for an LP.
Unlike a general partnership, a limited partnership survives the disassociation of any general or limited partner by default. However, if the limited partnership ends up without at least one general partner, one must be selected by the limited partners, or they may choose instead by majority vote to dissolve the partnership.
These conditions and others can be altered by written agreement, and it is even more important for an LP to have a partnership agreement than it is for a general partnership. General partners will want to be sure that their responsibilities are agreeable and adequately compensated, and limited partners will seek acceptable returns on their contributions and adequate access to books and records. And all partners should be on the same page from the start.
If you need assistance with forming an LP, filing or amending a Certificate of Limited Partnership, or drafting or reviewing a partnership agreement, PLF may be able to help. Let's get Started!
Limited liability partnerships (LLPs) are a type of partnership where the general partners have personal liability protection from the debts, obligations, and acts of the business.
As a result, LLPs are a good fit for persons who wish to participate in the management of the business, but want to be protected from the obligations or actions that other partners undertake on behalf of the business.
LLPs are a common choice for licensed professionals such as CPAs, lawyers, and doctors. For this reason, some states limit the personal liability protection afforded to partners in a LLP to only the malpractice of other partners. However, in Colorado, LLPs are not limited to professionals and the liability protection is not limited to malpractice.
An LLP is formed by filing a Statement of Registration with the Secretary of State. The Statement is short, but significant as the foundational document for an LLP.
The default rights and obligations of ownership and management in an LLP are like that of general partnerships, except that the disassociation of a partner will not automatically dissolve the partnership so long as two or more partners remain in the LLP.
It is even more important for an LLP to have a written partnership agreement than it is for a general partnership. This is due to the fact that the limited liability afforded to the partners may be legally disregarded in the event that business formalities are not followed, which is difficult in practice if not defined upfront in a written agreement. Two articles on this site discuss "veil piercing" more fully: The Current State of Veil-Piercing Law (Colorado) and LLC Talk: Single-Member LLCs - Asset Protection.
As noted above, the treatment and recognition of LLPs varies from state to state. And as a newer entity, there are fewer interpretative guidelines for LLPs than other sorts of partnerships.
If you need assistance with forming an LLP, filing or amending a Statement of Registration, or drafting or reviewing a partnership agreement, PLF may be able to help. Let's get Started!
Limited liability limited partnerships (LLLPs) are limited partnerships where the general partners also have personal liability protection from the business’s debts, obligations, and acts. Of course, limited partners still retain liability protection by virtue of being limited partners who do not participate in the management of the business.
Like LPs, LLLPs give a partnership the ability to attract investment and raise capital through equity. Limited partners remain liable only to the extent of their contribution to the partnership. However, because the general partners of LLLPs are also not personally liable, this may materially alter the business arrangement for some (potential) limited partners.
New businesses and existing LPs may register as LLLPs, thereby establishing personal liability protection for all partners, whether general or limited. But existing businesses that convert to LLLPs generally benefit from reconsidering their partnership agreements in light of the conversion.
In Colorado, LLLPs can be formed under two different statutes. Formation under the Colorado Uniform Partnership Act requires partners to file a Statement of Registration for a Limited Partnership with the Secretary of State.
An LLLP may also be formed under the Colorado Uniform Limited Partnership Act, by filing a Certificate of Limited Partnership and Statement of Registration with the Secretary of State.
As with LLPs (above), the liability protection of general partners may be legally disregarded according to a theory of veil piercing when, e.g., personal and business assets or accounts are commingled, or the business is use fraudulently or otherwise improperly (such that it seems unfair or inequitable to shield the partners from personal liability). To learn more about veil piercing, click here.
Some states do not recognize and others do not allow the formation of LLLPs, so carefully consider the expected reach of your business before forming an LLLP. Furthermore, as relatively new entities, interpretive guidelines are sometimes lacking for LLLPs.
If you need assistance with forming an LLLP, filing or amending a Statement of Registration or Certificate of Limited Partnership, or drafting or reviewing a partnership agreement, PLF may be able to help. Let's get Started!
Limited partnership associations (LPAs) are new entities that are less like partnerships than they are a hybrid between limited liability companies (LLCs) and corporations. Owners of an LPA are not called partners, but "members" - and as with LLCs, members may participate in management directly or the LPA may be run by one or more managers.
Also like LLCs, LPAs have by default an indefinite lifespan and restrictions on the withdrawal of members, but they also require bylaws, annual meetings, and the election officers much more like a corporation would. In this way, LPAs are like LLCs with several additional formalities that make them more like corporations (than LLCs are).
However, LPAs are like partnerships -- and unlike LLCs -- in that they require two or more persons as members. So, while there are single-member LLCs, there are no single-member LPAs.
LPAs are formed by filing Articles of Association with the Secretary of State’s office. But, as noted above, they also must draft bylaws, portions of which must be filed in order to provide notice to the public regarding, e.g., the authority of managers. For more on bylaws, click here.
If some, but not all, members are involved in management, a written statement is also required at the time of filing that defines the various classes that do and do not participate in management.
These questions regarding the LPA's management election are both confusingly worded and very significant for the structure of the business and the rights and obligations of the members. Do you want each person with an ownership interest in the business to be able to act on its behalf and bind it to obligations? How should powers and duties be defined? Are limitations or expansions warranted?
Who has the authority to bind your business is important not because of that actual authority, but also because of the apparent authority it creates. In a corporation, for example, a shareholder cannot take out a loan for the business; they lack the authority to do so. An officer, however, may be able to do so.
Apparent authority arises when someone who actually lacks the authority to obligate your business, reasonably seems to a third party to have that authority. In that case, they may be able to bind your business without any actual authority to do so. For a more complete discussion of apparent authority and its dangers, see Understanding Apparent Authority: How an Unauthorized Partner Can Bind Your Business.
As with most businesses, it is generally prudent to consider these questions at the outset. But for LPAs it is particularly important since any restrictions on the agency of managers or members that are not incorporated in bylaws filed with the Secretary of State, are unlikely to have the desired effect. This is because the filing of the bylaws serves as notice to the public and, absent this filing, courts will protect an innocent person who had no way to discover the attempted restrictions.
LPAs are terminated by filing articles of dissolution on the authority of the affirmative, unanimous vote of all of the partners (unless otherwise specified in the bylaws). Thus, the transfer of membership interests does not affect the continued existence and operation of LPAs.
LLCs and other partnerships may convert to LPAs. But this is a new structure - nearly unique to Colorado - with few interpretive guidelines. As a result, it may be difficult to know in certain situations whether a court may treat LPAs more like partnerships, LLCs or corporations.
If you need assistance with forming an LPA, filing or amending Articles of Association, or drafting or reviewing bylaws, PLF may be able to help. Reach out, Today!