Chapter 3 - § 3.5 • PARTNER STATUS
| Jurisdiction | Colorado |
§ 3.5.1—Admission of New Partners
Under CUPA and CUPL, a person may become a partner only with the consent of all of the partners or pursuant to the terms of the partnership agreement.349 Under CULPA, after the filing of a limited partnership's original certificate of limited partnership, additional general partners may be admitted as provided in writing in the partnership agreement or, if not so provided, with the consent of all partners.350 Upon the withdrawal of the last remaining general partner, unless the partnership agreement otherwise provides in writing for the admission of a general partner, "one or more persons who consent to be general partners" shall be admitted as follows:
(a) A majority of the limited partners may admit one or more general partners; and
(b) If a majority of the limited partners fails to act within a reasonable time, the district court for the county in this state in which the street address of the limited partnership's principal office is located, or, if the limited partnership has no principal office in this state, the district court for the county in which the street address of its registered agent is located, or, if the limited partnership has no registered agent, the district court for the city and county of Denver shall, upon the application of any limited partner, admit one or more general partners. Such court may appoint a custodian to manage the business of the limited partnership during the pendency of the proceedings.351
Where persons acquire a partnership interest directly from the limited partnership, they may be admitted as limited partners as provided in writing in the partnership agreement or, if the partnership agreement does not address that issue (or if there is no partnership agreement),352 with the consent of all partners.353
Under CULPL, after the filing of the certificate of limited partnership, admission of a new general partner requires "the written consent or ratification of the specific act by all the limited partners."354 Retirement, death, or insanity of a general partner dissolves a CULPL limited partnership unless the remaining general partners continue the business under a right to do so stated in the certificate of limited partnership or with the consent of all partners, general and limited.355
§ 3.5.2—Minors as Partners
See § 3.3.2, "Admission of Minors as Members."
§ 3.5.3—Transferability of a Partnership Interest
As with an LLC's membership interest, a "partnership interest is personal prop-erty"356 and therefore is transferable unless the partnership agreement provides to the contrary.357
Some partnership agreements may provide for relatively free transferability, allowing the assignor to cause the assignee to be admitted as a limited partner upon assignment or upon compliance with certain conditions set forth in the partnership agreement.358 Otherwise, the assignee may be admitted only as provided in the partnership agreement or, if not so provided, with the consent of all partners.
§ 3.5.4—Entitlement to Distributions — Partnerships
The general partner of a partnership that has not registered as an LLP or the general partner of a limited partnership that has not registered as an LLLP is potentially liable to creditors whether or not the general partner received a distribution in compliance with the partnership agreement or in violation thereof.359 Where a general partnership has registered as an LLP, or a limited partnership has registered as an LLLP, however, the general partner's obligation to return wrongful distributions is more limited. The limitation360 is similar to the corresponding provision for LLCs: The partnership may not make a distribution to its partners when the result of the distribution would be fair market value insolvency. As with the LLC Act, distributions do not include reasonable compensation paid to the general partners. Unless otherwise agreed, a general partner who receives a wrongful distribution knowing that the distribution was wrongful will be liable to the partnership for three years. A general partner who received a distribution not knowing that the distribution was illegal is not liable for a return of the distribution.
As with LLCs, none of the partnership statutes requires that distribution be made before dissolution, and the U.S. Treasury Department will not care either because the income tax on the partners is based on the partners' allocable shares of the partnership's income, whether or not distributed.361 Accordingly, if a person who is about to become a partner wants to know when and under what circumstances the partnership will make distributions, this should be negotiated up front.
As discussed in § 3.3.6, "Entitlement to Distributions — LLCs," the Colorado Supreme Court held that a creditor of an LLC could not enforce the distribution limitation provisions of § 7-80-606(2) of the LLC Act.362 These authors believe the court's analysis should be equally applicable to LLPs and LLLPs. If correct, the partnership agreement may reduce (indeed, eliminate) or enlarge the three-year period that the partner would otherwise be liable to the LLP or LLLP under CUPL § 7-60-146(3) or CUPA § 7-64-1004(3) for an improper distribution.363
§ 3.5.5—Economic Issues
The discussion for LLCs in § 3.3.7, "Economic Issues," is equally applicable to an analysis of the consequences of admitting a new partner to a business operating as a partnership or limited partnership. As described in § 3.3.7, these issues become more complex if the partnership agreement has special allocations among the members, recourse or non-recourse debt, a basis in partnership assets that differs from the partners' capital accounts, and other factors.
As with an LLC, admission of new partners to a partnership generally is simple at the inception of the business, and no adverse economic consequences will result.364 However, admission of a new partner to a business that has been operating as a partnership and has built-in but unrealized value in the business may result in tax and economic consequences, both to the existing partners and to the new partner.365
§ 3.5.6—Resignation or Expulsion of a Partner of a General Partnership
Resignation
Under CUPA § 7-64-601(1)(a), a partner may resign (dissociate) from a partnership by providing notice of the partner's "express will" to do so. Section 7-64-602(1) goes on to say that a partner has the right to dissociate from a partnership at any time, regardless of whether the dissociation is rightful or wrongful. If a partner's resignation results in a "wrongful dissociation," the resigning partner is liable to the partnership and to the other partners for damages caused by the dissociation.366 Of course, dissociation can only be wrongful if it is in violation of an agreement among the partners. If there is no provable agreement, these authors do not believe dissociation can be wrongful.
In either case, a partner's dissociation from the partnership terminates the former partner's right to participate in management, and the prohibition found in C.R.S. § 7-64-404(1)(c) on the partner's right to compete with the partnership ends (except to the extent there are other, enforceable non-compete obligations). Certain of the dissociating partner's obligations to the partnership and its partners continue "with regard to matters arising and events occurring before the partner's dissociation."367 These include the obligations:
• To account to the partnership for its assets;368
• To refrain from dealing with the partnership in the conduct or winding up of its business as an interested or adverse party;369 and
• To continue to exercise a duty of care in connection with partnership matters.370
CUPA provides that if "a partner is dissociated from a partnership without resulting in a dissolution and winding up of the partnership business," the partnership "shall cause the dissociated partner's interest in the partnership" to be purchased for an amount equal...
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