General Partner vs. Limited Partner

What Makes EnergyFunders Different

Top Three Tax Deductions for Oil and Gas Investments

With EnergyFunders you can invest as a general partner or limited partner.

The main reason to invest as a general partner vs. limited partner is to be able to deduct your investment from active income. If you invest as a limited partner, you deduct your investment from passive income.

However, if you are a general partner, you have unlimited liability, and if you are a limited partner, you have limited liability. This is also a factor to consider when choosing whether to be a general or limited partner.

EnergyFunders converts all general partners to limited partners when the well begins producing. This allows general partners to minimize tax liability when the well is producing. These tax benefits are in addition to the oil and gas tax deductions all investors can.

If you want all the legal details, read on.

General Partner Interests

Tax Consequences

Generally, if you invest as an investor general partner, then your share of the partnership’s deduction for intangible drilling costs will not be subject to the passive activity limitations on losses. You may claim a deduction in an amount equal to not less than the percentage of your net subscription amount used to pay for intangible drilling costs for all of the wells to be drilled by the partnership in that taxable year.

Please consult your tax professional to determine how this applies to your particular tax situation.

Unlimited Liability

If you invest as an investor general partner (GP), you will have unlimited liability regarding the partnership’s activities.

This means that if (1) the partnership’s insurance proceeds from any source, (2) the managing GP’s indemnification of the investor general partners, and (3) the partnership’s assets were, collectively, not sufficient to satisfy a partnership liability for which the investor general partners were also liable solely because of your status as general partners of the partnership, then the managing GP would require the investor general partners to make additional capital contributions to the partnership to satisfy the liability.

In addition, the investor general partners will have joint and several liability, which means, generally, that a person with a claim against the partnership and/or an investor general partner may sue all or any one or more of the partnership’s general partners, including you, for the entire amount of the liability.

Assessibility

You will be able to determine if your interests are subject to assessibility based on whether you buy investor general partner interests, which are assessible, or limited partner interests, which are non-assessible.

Conversion Timeline

Your investor general partner interests will be automatically converted by the managing GP to limited partner interests upon the occurrence of the earlier of (1) the drilling and completion of all of the partnership’s wells, as determined by the managing GP or its professionals, or (2) the date that no additional currently deductible intangible drilling costs will be realized by the partnership’s investor general partners, as determined by the Managing GP.

In this regard, a well is deemed completed when production equipment is installed on a well, even though the well may not yet be connected to a pipeline for production of oil or natural gas.

The timeline for such conversion depends on the timing and amount of the sale of the interests and the availability of appropriate projects being sourced by the partnership’s operators. The partnership will generally invest in projects at the time leases are acquired through the completion of the wells. Once all of the wells within all of the partnership’s projects are completed, the investor general partner interests will then be converted to limited partner interests.

If the offering raises the maximum offering amount, the partnership will be able to drill more wells and the larger number of wells would be expected to take longer to drill. If the offering raises less than the maximum offering amount, the number of wells that may be drilled will be less and, therefore, drilling would be expected to be completed sooner.

The conversion is not expected to create any tax liability to the investors. We are not tax advisors, please consult your tax advisor regarding your particular tax situation.

Effect of Conversion on Liability

Once your interests are converted, you will have the limited liability of a limited partner under Texas law for partnership obligations and liabilities arising after the conversion. However, you will continue to have the responsibilities of a general partner for partnership liabilities and obligations incurred before the effective date of the conversion.

For example, you might become liable for partnership liabilities in excess of your subscription amount during the time the partnership is engaged in drilling activities and for environmental claims that arose during drilling activities, but were not discovered until after the conversion.

Limited Partner Interests

Tax Consequences

If you invest as an investor limited partner, then your use of your share of the partnership’s deduction for intangible drilling costs will be limited to offsetting your net passive income from “passive” trade or business activities.

Please consult your tax professional to determine how this applies to your particular tax situation.

Limited Liability

If you invest as a limited partner, then you will have limited liability for the partnership’s liabilities and obligations.

This means that you will not be liable for any partnership liabilities or obligations beyond the amount of your subscription amount in the partnership and your share of the partnership’s undistributed net profits, subject to certain exceptions set forth in the materials provided.