Chapter 3 - § 3.4 • FORMATION AND MANAGEMENT OF PARTNERSHIPS AND LIMITED PARTNERSHIPS

• Jurisdiction: Colorado

§ 3.4 • FORMATION AND MANAGEMENT OF PARTNERSHIPS AND LIMITED PARTNERSHIPS

The formation and management of general and limited partnerships bears great similarity to that of LLCs. The similarity exists in large part because the LLC Act is based on both corporate and partnership statutes, and the Colorado Uniform Limited Partnership Act (CULPA) is linked to the general partnership statutes for many issues.²⁵⁴ Because of the similarity, a reader should understand § 3.2 before reading this § 3.4.

§ 3.4.1—Formation of Partnerships and Limited Partnerships

Generally, any person (individual or entity)²⁵⁵ can form a partnership or limited partnership. Unlike LLCs, partnerships and limited partnerships must be established for a business purpose — a partnership is defined as "the association of two or more persons to carry on as co-owners a business for profit."²⁵⁶ Moreover, CUPA defines "partner" as "a person who is admitted to a partnership as a partner of the partnership."²⁵⁷ CULPA states that "[a] limited partnership may carry on any business that a partnership without limited partners may carry on except as prohibited by law."²⁵⁸

These authors know of several instances in which an individual formed a limited partnership and never transferred any property to it other than a personal residence. If a limited partnership owns no income-producing property and conducts no other business or financial activity, there is a question whether it is a validly formed limited partnership. In that case, an LLC would be a much better choice since it does not require a profit motive or a business purpose.²⁵⁹

General partnerships may still be formed by a handshake under CUPA;²⁶⁰ no filing with the Secretary of State is necessary. Indeed, formation does not even require a handshake: § 7-64-202(1) states that "the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership" (emphasis supplied). Formation of a limited partnership, however, requires the filing of a certificate of limited partnership with the Secretary of State.²⁶¹ All general partners must approve the filing of the certificate of limited partnership.²⁶² A limited partnership formed at any time under CULPA may elect to be governed by CUPA for any case not covered by CULPA; however, as a result of 2016 amendments, all limited partnerships formed after August 10, 2016, will be governed by CUPA for any case not covered by CULPA.²⁶³ A limited partnership formed on or before August 10, 2016, that does not elect to be governed by CUPA will be governed by CUPL for any case not covered by CULPA.²⁶⁴

Partnerships can be for a definite term or specific undertaking. If a partnership continues beyond its term or undertaking without an express agreement, the rights and duties of the partners remain the same as they were at the expiration or completion so far as is consistent with a partnership at will.²⁶⁵ If partners or those who habitually acted in the business during the term continue the business without any settlement or liquidation, they are presumed to have agreed that the partnership will continue.²⁶⁶

§ 3.4.2—What Colorado Limited Partnerships Are Discussed in this Book?

CULPA governs limited partnerships formed in Colorado on or after November 1, 1981 (CULPA LPs).²⁶⁷ Limited partnerships formed in Colorado before that date (CULPL LPs) were formed under CULPL²⁶⁸ by the filing of a certificate of limited partnership for record with the county clerk and recorder for the county in which the limited partnership had its principal place of business.²⁶⁹ A CULPL LP may elect to be governed by CUPA for any cases not covered by Article 61.²⁷⁰ If the election is not made, a CULPL LP is governed by CUPL for such cases.²⁷¹ To make the election, a CULPL LP must file for record in the office of the county clerk and recorder in which its certificate of limited partnership is filed of record an amendment signed by all the general partners that includes a declaration that it elects to be governed by Article 64.²⁷²

A CULPL LP may elect to become subject to CULPA.²⁷³ If such an election is filed after July 26, 2009, the electing limited partnership becomes a reporting limited partnership.²⁷⁴ The discussion of limited partnerships in this book generally concentrates on limited partnerships that are formed under or subject to CULPA. However, for limited partnerships that remain subject to CULPL, in most instances this book notes the rule in CULPL that corresponds to a rule in CULPA.

§ 3.4.3—Can a Limited Partnership Exist Before Filing of the Certificate of Limited Partnership?

As a general rule, attorneys and regulators do not think of an entity (other than a traditional general partnership) coming into existence before the filing of the applicable formation document with the appropriate filing office. CULPA, at § 7-62-205, contains a provision of uncertain scope and provenance that states (in pertinent part):

(2)(a) For the purposes of this subsection (2), the definitions in section 7-62-101 shall apply; except that:

(I) "General partner" includes a partner who is identified or otherwise classified as a general partner by or in accordance with the agreement of the partners, notwithstanding any delay or failure to file an original certificate of limited partnership naming the general partner as such.
(II) "Limited partner" includes a partner who is identified or otherwise classified as a limited partner by or in accordance with the agreement of the partners, notwithstanding any delay or failure to file an original certificate of limited partnership.
(III) "Limited partnership" includes a partnership before the filing of the original certificate of limited partnership with the secretary of state and in which there is at least one general partner and one limited partner.
(IV) "Partner" includes a person who enters into the agreement contemplated in paragraph (b) of this subsection (2) as a co-owner with the rights of a general partner or a limited partner or who acquires an interest in a limited partnership as a co-owner with such rights.

(b) The presumptions set forth in this subsection (2) shall apply to each limited partnership whose partners enter into an agreement on or after October 31, 1981, to form such limited partnership, and to which a contribution is made by or on behalf of one or more of such partners before the filing of an original certificate of limited partnership for such partnership.
(c) It shall be presumed that the partners of such limited partnership shall have agreed that:

(I) The relationship of the partners with respect to any contributions made to the partnership and relations among the partners and between the partners and the partnership shall be the same as if a certificate of limited partnership had been filed pursuant to section 7-62-201 at the time the partners entered into the agreement contemplated in paragraph (b) of this subsection (2); and
(II) The general partners of such limited partnership shall approve such certificate and that the same shall be delivered to the secretary of state for filing pursuant to part 3 of article 90 of this title. . . .

(c.5) The failure or refusal of the general partners to approve such certificate or to deliver such certificate to the secretary of state, for filing pursuant to part 3 of article 90 of this title, shall entitle any partner to obtain a court order pursuant to section 7-90-313 approving an appropriate certificate and ordering the secretary of state to file the approved certificate.
(d) The presumptions set forth in this subsection (2) shall apply to such a limited partnership, notwithstanding any one or more provisions of any agreement of the partners of such limited partnership that:

(I) The term of such partnership shall commence upon the filing of such certificate;
(II) An agreement sets forth the entire understanding of the parties; or
(III) The agreement of the parties shall be in writing.

(e) The presumption set forth in subparagraph (II) of paragraph (c) of this subsection (2) shall not apply in an action for damages against a general partner by the other partners based on any delay or failure in the filing of a certificate of limited partnership.

This statute is confusing in that it contemplates the existence of a limited partnership before its certificate of limited partnership is filed with the Secretary of State.²⁷⁵ Moreover, the definition of limited partnership in CULPA § 7-62-101(7) states that a limited partnership "means an entity formed under this article by two or more persons and having one or more general partners and one or more limited partners." This implies "formation," which requires filing of a certificate of limited partnership in the office of the Colorado Secretary of State.²⁷⁶ These authors are unaware (after a WestLaw and CaseMaker search) of any case discussing C.R.S. § 7-62-205. Possibly, this statute was intended to protect the general partners and limited partners with respect to their relationship inter se when they agreed to form a limited partnership around the time of enactment of CULPA and the General Assembly felt a need to protect people who might be uncertain where or when to file a certificate of limited partnership in the transition from CULPL to CULPA. Of course, if a limited partnership commenced business prior to filing a certificate of limited partnership, the limited partners would be at risk of liability to third parties on the theory that prior to filing its certificate, the entity was a general partnership. CULPA § 7-62-205 is silent as to third parties.

Persons contemplating relying on § 7-62-205 should consider that a person who acts on behalf of an unformed entity will be liable to the third party under agency law, and the entity once formed will be unable to ratify the contract.²⁷⁷ Although the entity once formed may adopt the contract, adoption does not...