California General Partnership Law
The California general partnership law specifies that the partnership is between two or more persons who will work together as co-owners of a business.3 min read
2. Advantages and Disadvantages of a General Partnership
3. General Partnership Tax Process
Updated November 11, 2020:
The California general partnership law specifies that the partnership is between two or more persons who will work together as co-owners of a business with the goal being to make a profit.
Overview of the California General Partnership Law
A partnership may be either limited or general. The partnership is a separate entity distinct from its partners.
Limited Liability Partnership
In California, a limited liability partnership (LLP) business structure is an option. It provides limited liability protection for all its partners. An LLP is limited to professionals such as architects, CPAs, and lawyers. Until January 1, 2019, engineers and land surveyors are also allowed to form an LLP.
The "persons" in a general partnership may include individuals as well as other business entities. When a partnership is formed, most partners will create a formal partnership agreement that outlines each partner's rights and obligations. Creating and signing an agreement is not a requirement; a partnership can be established with just a handshake.
The laws relating to general partnerships in the state are outlined in the California Corporations Code, Title 2. Should a dispute arise as to the validity of the partnership, a partnership agreement is usually the determining factor used to establish its existence.
There is no limitation to the type of trade, profession, or occupation a general partnership may engage in. For information, see Corp. code 16101(1), (9). In the event that a general partnership is to engage in the banking business, the corporation would need to be organized for that structure. See Fin. Code 102.
All partners in a California general partnership are considered joint owners of the business. Each has an equal right in the company's management unless noted otherwise, and each share in the business's profits and losses in relation to what they contributed financially to the business. All partners in a general partnership are bound by the acts of another partner regarding partnership business unless the partner does not have the authority to act on behalf of the business and the other party is aware of this fact.
The formation of a general partnership is easier to organize than a corporation or a limited partnership. The arrangement of capital contributions, managing operations, management control, and the sharing of profits and losses is relatively simple to organize.
Advantages and Disadvantages of a General Partnership
- Easily established.
- Registering the partnership with the Secretary of State is not required.
- No filing fees.
- All profits and losses are passed through to each partner according to their percentage invested in the partnership.
- Partners, not the business, pay income tax on the profit.
- Multiple owners improve the chances of raising capital due to greater access to resources.
- The success level is high for the partnership because multiple partners bring more ideas to consider.
- Each partner is jointly liable for the actions/conduct of the other partners and any debts or other legal obligations related to the business.
- The personal liability of each partner is unlimited, meaning each partner's personal wealth is at risk. This can be helped with liability insurance.
- Before any partner's interest in the business can be transferred, it must be unanimously approved by all partners.
- In the event of the death of a partner or a partner who wishes to withdraw from the partnership, the business is dissolved. It can be formed again as a new business with the remaining participating partners.
- If the company name is anything other than the names of the partners, it must be registered as a fictitious name. This is also known as a "doing business as" name. The name must be registered in the county where the principal place of business for the partnership is located.
- With the absence of a written general partnership agreement, the company is subject to potential problems.
General Partnership Tax Process
As noted, a general partnership is not a taxable entity. Instead, the partnership must file information returns annually that outline the company's income, profits, and losses.
The state tax authorities for California do not levy income tax on a general partnership, but every partnership that does business in California or earns an income in the state should file Form 565 (Partnership Return of Income). General partnerships may be subject to other rules and regulations depending on the type/nature of the business.
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