Colorado Partnership Agreements
Under Colorado law, partnerships are governed by the Revised Uniform Partnership Act of 1997 (“R.U.P.A.”). R.U.P.A. defines a partnership as “the association of two or more persons to carry on as co-owners a business for profit.” R.U.P.A. § 101(6) (emphasis added). While in its most simplistic sense, the term person refers to an individual, R.U.P.A. expands that term to mean a “corporation, business trust, estate, trust, partnership, association, joint venture, government, governmental subdivision, agency, or instrumentality, or any other legal or commercial entity.” Id. at § 101(10).
Thus, the rules governing partnerships in Colorado are quite relaxed with respect to who and/or what can form a partnership. Furthermore, R.U.P.A does not require that the parties subjectively intend to form a partnership or draft a partnership agreement; the only requirement with respect to partnership formation is that the parties intend to carry on as co-owners a business for profit.
That being said, as a business person or entrepreneur, it is important that you take precautions when forming business relationships with other parties, especially considering the duties, rights and potential liabilities that a partnership entails. Having a business partnership attorney craft a sound partnership agreement is key.
Although no formal partnership agreementis required to form a partnership, more often than not, the parties to a partnership govern the precise nature of their relationship though a written partnership agreement. A partnership agreement allows the parties to prescribe different rules (i.e. rules that differ from those defined under R.U.P.A.) that govern their business relationship. However, R.U.P.A. § 103 enumerates certain statutory provisions that are non waivable, meaning that even with the existence of a partnership agreement, certain rules must still be adhered to. For example, a partnership agreement may not:
- unreasonably restrict the right of access to books and records…;
- eliminate the duty of loyalty…;
- unreasonably reduce the duty of care…;
- eliminate the obligation of good faith and fair dealing…;
- vary the power to dissociate as a partner…except to require the notice…to be in writing…;
- vary the right of a court to expel a partner…;
- vary the requirement to wind up the partnership business in [certain] cases…; or
- restrict [the] rights of third parties under [R.U.P.A.]. Id.
So, why do partnership agreements exist? Why don’t partners merely shake hands and allow their business relationship to be governed by the statutory provisions of R.U.P.A? The answer is two-fold. First and foremost, a partnership agreement provides a business with structure and thus helps to avoid uncertainty. Second, by defining the rights, duties and liabilities of the partners, a partnership agreement precludes the automatic application of potentially unseemly statutory law. See When a Handshake Is Not Enough: Why You Need a Partnership Agreement, available at http://www.ozsmallbiz.net/partnership-agreements/. For example, with respect to business profits, absent a provision in the partnership agreement to the contrary, profits will be divided equally among the partners, regardless of each individual partner’s capital contribution or effort. Id.
Similarly, unless stated otherwise in the partnership agreement, losses incurred by the business will be allocated among the partners in the same manner as profits. With respect to the liabilities of the company, absent a provision in the partnership agreement to the contrary, all partners will be held jointly and severally liable, meaning if one partner incurs a debt which he or she fails to pay, the creditor may opt to collect the entire debt from any partner. Id.
Finally, with respect to business decisions, absent a provision in the partnership agreement to the contrary, each partner has an equal say in the business. Id. While allowing each partner to have an equal say in reaching business decisions seems fair and equitable, it often leads to disputes and could potentially lead to the dissolution of the business. Id.
For more information on partnerships or other business entities, please feel free to contact Peter B. Ford, Esq. at Watson & Associates, LLC. or call 720.941.7200
