Colorado Law Provides Opportunity to Limit Liability of General Partners
January 1, 2010
House Bill 1061 (hereinafter the "Act") was signed into law by Governor Romer on May 24, 1995. The Act significantly changes partnership law by permitting existing and future general partnerships to register as limited liability partnerships ("LLPs") and by permitting existing and future limited partnerships to register as limited liability limited partnerships ("LLLPs"). The principal significance of the registration of a partnership as an LLP or LLLP, as the case may be, is to provide limited liability to the general partners in the registered partnership. The Act also creates a new entity, the Limited Partnership Association ("LPA").
DISCUSSION OF THE ACT
In an unregistered general partnership, all partners are jointly and severally liable for all partnership debts and obligations. Essentially, joint and several liability means a creditor may pursue any one or more of the partners of the partnership for the satisfaction of partnership debts and obligations.
If a general partnership registers with the Colorado Secretary of State pursuant to the Act, the personal liability of general partners for the debts, obligations, and liabilities of the partnership will be eliminated; except that the registration does not eliminate a general partner's individual liability for partnership debts, obligations, and liabilities (i) that result from the partner's own negligence, wrongful acts, or misconduct, (ii) that were incurred before registration or at any other time when the partnership was not registered, and (iii) for which the partner is liable pursuant to a provision in the partnership agreement or other contractual obligations. Additionally, a partner will also be personally liable if the creditor can pierce the statutory limitation on liability by successfully asserting a "piercing the corporate veil" theory. For example, assume there is a registered general partnership known as ABC Partnership, LLP, with individual partners A, B, and C. If partner A commits negligence and injures a third party while acting on behalf of the ABC Partnership, LLP, the injured third party can seek payment from the partnership and personally against A, but not personally against partner B or partner C. If ABC Partnership is not registered, the injured third party could seek payment not only from the partnership and personally against partner A, but also personally against partners B and C.
The Act also permits the registration of a limited partnership as a limited liability limited partnership. Registration as an LLLP affords the general partners of limited partnerships the same liability protection granted general partners in an LLP described in the previous paragraph.
To register an existing partnership as an LLP or an LLLP, a registration statement must be filed with the Colorado Secretary of State together with a $50.00 filing fee. Registration must be approved by all general partners. Additionally, the name of an LLP must contain the words "Registered Limited Liability Partnership" or "Limited Liability Partnership" or the abbreviations "L.L.P.", "LLP", "R.L.L.P.", or "RLLP".
Registration as an LLP or LLLP likely will not require consents from third parties, such as lenders or suppliers. The Act specifically provides that a partnership or limited partnership that has been registered is for all purposes the same entity that existed before it registered. Consequently, an LLP registration should not change title to or constitute a transfer of partnership property.
ITEMS TO CONSIDER IN CONNECTION WITH REGISTERING UNDER THE ACT
All general partners in partnerships should take time to understand the provisions of the Act in order to decide whether they should take affirmative action to take advantage of the Act's protections by registering the partnership. In many cases, the limitation of liability granted to general partners may be a good reason to register. There are commentators who have stated that all partnerships should register. There may, however, be good reasons not to register (for example, the only general partner may be a corporation, or the limited partners might object to registration because it changes the business deal among the partners). Each partnership should carefully consider all issues before registering.
Following is a short, but not exhaustive, list of items that general partners should consider when deciding whether to register:
The limitation of general partner liability provided in the Act is overridden by contrary provisions in the partnership agreement. Accordingly, if a partnership desires to register, it may also have to amend its governing documents to delete provisions that impose liability on general partners.
In certain cases, registration could negatively affect the tax classification of the partnership (i.e., instead of being taxed as a partnership, the registered partnership might be taxed as a corporation). This could be a severe negative consequence that should be carefully considered before registration.
Even if the partnership is registered, the assets of the partnership remain subject to the claims of creditors. Consequently, each partner's "interest in the partnership" remains at risk. Accordingly, it may be advisable to analyze whether there are excess assets in the partnership that are not needed for operations and, if so, distribute these assets or transfer them to an entity less likely to be subject to liability.
As mentioned previously, this list is not exhaustive. Before registering a partnership, these items and possibly others, depending upon the individual circumstances of a partnership, must be analyzed. The costs associated with analyzing whether registration is appropriate could be minimal, however, when compared with the liability a general partner of an unregistered partnership may incur.
LIMITED PARTNERSHIP ASSOCIATIONS
The Act also creates a new, flexible entity, known as a limited partnership association. In a general way, the LPA can be thought of as an "unincorporated corporation," i.e., it closely resembles a corporation and is formed by filing articles of association with the Colorado Secretary of State. The Act provides that the degree of formality or informality of an LPA can be modified by the LPA's articles and bylaws, which can be used to override many provisions of the Act. One of the major benefits of the LPA is that, although it has many corporate features, unlike a partnership it does not dissolve upon the resignation, death, incompetence, or bankruptcy of a member. Consequently, the LPA may be an alternative to a limited liability company ("LLC"), LLP, or LLLP when the owners want to have continuity of life.
The Act provides limited liability to general partners in registered partnerships instead of unlimited liability for general partners in unregistered partnerships. General partners should consider registering their partnerships to take advantage of the Act's protections. Also, the Act creates the LPA, which may be used in certain situations when an LLC, LLP, or LLLP is not suitable for a particular venture.
This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.
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Comments or inquiries may be directed to:
Robert L. Loeb.