A partnership is an association of two or more persons intending to carry on a business as co-owners. If all of the partners have equal rights to control the business and benefit from the money it makes, then they have formed a “general partnership.”
One of the risks general partners face is that they are personally liable for the company’s debts and liabilities. If the business runs up more debt than it can pay off, or If the plaintiff in a lawsuit against the partnership wins more money than the partnership has, the general partners must take money out of their personal funds to pay the debt or the damages award, even to the point of selling their real estate or personal property.
Another way to structure the business is to form a limited partnership (LP). (Other business structures include sole proprietorships, limited liability companies (LLCs), and corporations.) An LP comprises two distinct types of partners: limited and general. Limited partners only provide money – an investment or a loan – and they act as silent partners.
In exchange for their lack of involvement, limited partners enjoy limited liability for the company’s actions. If the company gets sued or has excessive debt, limited partners can only lose the amount of money they invested in the business. This is unlike the general partner(s) who are personally liable for the LP.’s debts and legal actions.
General partners run the day-to-day operations of the company. Limited partners have no say in those areas. If a limited partner gets involved with running the business, they run the risk of losing their protected status as limited partners, and creditors may go after them for the company’s liabilities.
Limited partnerships are an appealing way for a partnership to raise capital. The limited partners are usually investors with no particular interest in the business operations. Instead, they are typically seeking investment opportunities to earn a meaningful return on their investment in a successful venture.
What are the Requirements to Form an LP in Colorado?
When creating an LP in Colorado, one of the first things you need to decide is your company’s name. The state of Colorado requires all LPs to include one of the following in their name:
- Limited partnership;
- Limited;
- Company;
- L.P.;
- LP;
- Ltd.; or
- Co.
Each LP must have at least two partners; at least one partner has to be a general partner, and at least one partner must possess limited liability. General partners can be a person or another company.
Another requirement you must fulfill is to select a registered agent who can be served in case of a lawsuit. A registered agent can be anyone over 18 who lives or works in Colorado or any company with a usual business place in the state.
What Paperwork Do I Need to Form an LP in Colorado?
To register formally as an LP in Colorado, you must file a Certificate of Limited Partnership on the Colorado Secretary of State’s website. When filling out the required paperwork, you will need to include the following information:
- The company name
- The business’ principal office address
- The name and address of the registered agent
- The names and addresses of each general partner
- Confirmation that there are at least 2 partners and at least one of these partners has limited liability
Finally, the Certificate of Limited Partnership must be signed by the person filling out the form. They must also put down their name and address as the person filing to create the LP.
The requirements and paperwork needed to create a limited partnership in Colorado successfully can sometimes be complex. You may need to work with a legal professional for guidance during the process to ensure that all steps are completed properly. You don’t want to assume that the state will deem you a general partnership instead of an LP.
Partnership Agreement
The partners of the limited partnership must draft a partnership agreement. This document defines how the business will be operated. This agreement outlines the rights, responsibilities, and expectations of each partner.
The partnership agreement need not be filed with any governmental authority, but this does not mean it can be skipped. The partnership agreement is the only thing that formally explains the roles of the general and limited partners. The limited partners must have this in writing – it protects them from responsibility for the partnership’s debts and other liabilities.
What Benefits Does Colorado Give to an LP?
Under the Colorado Uniform Partnership Act, an LP can limit even a general partner’s right to manage and act on behalf of the LP. Thus, a Colorado LP can sometimes have an operating agreement that allows the company to operate more like a corporation, wherein the general partners may have different levels of responsibility and rights toward the LP. This contrasts with a traditional partnership, where general partners equally share all rights and responsibilities toward the LP.
One main benefit of LPs is that they are less subject to immediate dissolution than a normal partnership. When one partner leaves the business, the partnership is immediately dissolved into a general partnership. This can be problematic regarding the company’s contracts with clients and suppliers.
Under the rules governing limited partnerships, the limited partners can withdraw from their role without the partnership dissolving as a result. This type of feature can allow long-term changes to be made in the business without causing a delay in business operations. Such an arrangement is possible because limited partners typically do not take a lead part in the company’s management.
Alternatively, limited partners can also sometimes change their role if they begin to take on a more active part in the company’s management. At this point, they might not be considered a limited partner anymore but may function more like a traditional general partner.
What Disadvantages Do Colorado LPs Face?
The state of Colorado requires that all LPs file annual reports within the financial quarter of their anniversaries. Additionally, Colorado charges a filing fee for every document that can be filed for an LP; most states only charge filing fees for certain documents, not others. This is important because if you do not renew your LP, the LP will be automatically dissolved by the state.
While LPs will not automatically dissolve if a limited partner retires or withdraws, these incidents can still result in partnership disputes or other business challenges. These situations can depend on what the partnership agreement or contract says, so it may be best to have an attorney review any agreements.
Thus, it may be necessary to have an attorney review the overall partnership agreement so that all parties involved understand the consequences of a partner withdrawing or terminating their role with the company.
Should I Hire a Business Lawyer to Form an LP in Colorado?
Forming an LP in Colorado can be a complex task. The assistance of a corporate lawyer in Colorado can be very helpful when forming your company as an LP.
They can help answer your questions and ensure you do not make any major errors when completing the necessary paperwork. They can help you register your LP and fill out all of the required paperwork to make it legal. Your attorney can also provide representation if you face legal disputes or conflicts.
