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Posts Tagged ‘Colorado Partnership Act’

On May 14, 2009 Governor Ritter signed changes to the Colorado General and Limited Partnership Acts allowing for “partners” in Colorado partnerships who do not have an economic interest or investment .  House Bill 1248 added language to both the Colorado Limited Partnership Act and the Colorado General Partnership Act expressly authorizing the admittance of partners who do not make an investment, and who do not share in the profits, losses or distributions of the partnership.  This new class of “non-economic partner” will allow such “partners” to have all the rights, duties and liabilities of a partner in a partnership, while being paid solely as an employee.  For example, a professional partnership could have two levels of partners (1) traditional partners (2) and non-economic partners who are paid a salary, do not receive allocation of profits, losses and distributions, but are nevertheless partners in the firm. 

This new class of partner is different form a “profits interest” partner.  A “profits interest” partner becomes a partner without making any quantifiable contribution to the partnership – in other words, he or she does not buy the partnership interest, nor contribute anything of measurable value such as property or assets in exchange for the partnership interest, but after the date of admission receives an allocated share of profits, losses and distributions.  Under partnership tax accounting rules, each partner is assigned or allocated a capital account, with a capital account balance reflecting the investment or contribution the partner made to the partnership.  The capital account balance is adjusted over time to reflect profits, losses, distributions and additional contributions.  A “profits interest” partner receives an initial capital account balance of $0.00.  A “non-economic” partner under this new law would not have a capital account, does not receive a future share of profits, losses and distributions, and would not be a partner for purposes of federal tax accounting rules and regulations.

General Partnerships and Limited Partnerships

Non-economic partners will be allowed in a general partnership so long as the partnership has at least two economic interest partners.  The new law also clarifies that a non-economic partner may be a partner in a limited partnership, so long as there is at least one partner with an economic interest.   This will allow limited partnerships where the general partner does not have to make an investment and has no economic interest, but may be paid fees or a salary, and will also allow the formation of a limited partnerships where only the general partner makes an initial investment, and limited partners may be admitted later as they invest funds.  Limited partnerships are often used as venture capital funds, hedge funds or private equity funds.  Fund managers, who are the general partners, will now be able to (1) manage funds as general partners and receive fees, without having to make an equity investment, and (2) form limited partnerships with only the manager as a member, and admit the limited partners at a later date as they invest in the limited partnership.

Non-Economic Partners Beware

Each partner in a general partnership, and each general partner in a limited partnership, is liable for the debts and obligations of the partnership.  A thriving business enterprise operated as a partnership can take-on substantial debt, such as office and equipment leases, loans and trade credit.  If the business suffers a down-turn, the general partners are liable for those obligations.  The incentive to accept such risk comes from the benefits of ownership – a say in the business and a share in profits and distributions.  However, a “non-economic” partner would have all the potential liability of a partner without the economic benefits and voting rights that normally offset the risks.

Non-economic partnership interests should not be granted or accepted before the parties have a complete understanding of the risks and rewards, and have considered options to reduce the risks, such as using a limited liability partnership, funded indemnity protection, and use of a limited liability entity to hold the non-economic partnership interest.

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