Key Takeaways

  • A California limited partnership (LP) requires at least one general and one limited partner.
  • LPs offer liability protection for limited partners while giving management authority to general partners.
  • Filing a Certificate of Limited Partnership with the California Secretary of State is mandatory.
  • LPs must comply with naming rules, local permits, and annual tax obligations (including the $800 franchise tax).
  • A written partnership agreement is highly recommended.
  • LPs must maintain good standing with biennial Statements of Information and can face suspension for noncompliance.
  • Dissolution involves a formal filing process and resolving outstanding liabilities.

A California Limited Partnership refers to a type of business entity in the state of California that consists of at least one limited partner and one general partner. A limited partnership combines elements of a general partnership with the limited liability of a corporation.

Limited Partnership

A limited partnership, or LP, occurs when two or more partners conduct a business in which one or more of the partners is liable only for the amount of money invested.

  • The general partner:
    • Has full management control of daily functions.
    • Responsible for the company's debts and obligations.
    • Can be a corporation or a limited liability company.
  • The limited partners:
    • Are investors.
    • Give up management control for monetary protection.
    • Liable for the amount of money invested.
    • Can't withdrawal their investments without permission from the the general partner(s).

California Limited Partnership Requirements

The Business Entities Division of the California Secretary of State outlines and regulates the conditions a business must follow to establish a limited partnership. California state requirements include:

  • A minimum of one general partner and one limited partner.
  • A service agent who lives and is employed in the state of California. This agent is responsible for the limited partnership's legal paperwork.
  • The LP has to have a business location in California.
  • For in-state businesses, a Certificate of Limited Partnership Form
    • Includes:
      • Name of the company.
      • The company's California office address.
      • Mailing address if different that the office.
      • Service agent's name.
        • Address must be included if the agent is a person.
      • Names, addresses, and signatures of each general partner.
  • For out-of-state businesses operating in California, a Foreign Limited Partnership Application:
    • Includes:
      • Name of LP.
        • If the name doesn't meet state standards, another name must be provided.
      • Mailing and street address of the company.
      • Any other addresses that the company is responsible for.
    • Where and when the first LP was created.
    • Name and address of the LP's service agent, who must live in California.
    • All general partners names and addresses.
    • A minimum of one signature from a general partner.

All required documents can be found on the California Secretary of State website, and can be sent by mail or filed in person.

Filing and Compliance Requirements

In addition to formation, a California limited partnership must meet ongoing compliance obligations to maintain good standing:

  • Statement of Information: LPs are required to file a Statement of Information (Form LP-2) every two years with the California Secretary of State. This document updates partner and agent information.
  • Franchise Tax: California LPs must pay an annual $800 minimum franchise tax to the California Franchise Tax Board, regardless of income or business activity.
  • Registered Agent Obligations: The designated agent for service of process must be continuously maintained. If the agent resigns or the business relocates, updated information must be filed promptly.
  • Name Availability and Reservation: Before filing, LPs may reserve a business name for 60 days by submitting a Name Reservation Request Form and paying the applicable fee.
  • Foreign LP Compliance: LPs formed in another state but doing business in California must file a Foreign Limited Partnership Registration (Form LP-5) and also comply with California’s annual tax and filing requirements.

Advantages

Forming a limited partnership in California has several advantages. Both partners benefit from revenue, investment profits, minimal income taxes, and tax incentives. Other advantages include:

  • Access to resources and programs that provide support and business advice, such as the Small Business Development Centers.
  • Basic reporting and meeting requirements where an annual report, yearly meetings and minutes are not required.
  • Special tax treatments: partners are taxed individually on income based on their share of the profits and losses.
  • Business structure:
    • Forming an LP is easy
    • Informal organization
    • Job responsibilities and rights are distinct and clear
    • Reassigning ownership and management roles are more difficult
    • One person is liable for debts
    • General partners have to act in the best interest of the company and their partners

Disadvantages

Limited partnerships in California must pay an $800 annual franchise tax. Also, out-of-state partners are subject to withhold income tax if income is more than $1500.

Legal and Tax Responsibilities for Partners

While a California limited partnership offers liability protection to limited partners, both classes of partners have legal and tax responsibilities:

  • General Partners: Are personally liable for all debts and obligations of the LP. They also owe fiduciary duties of loyalty and care to the partnership and its partners.
  • Limited Partners: Although shielded from liability, limited partners can lose that protection if they take part in managing the LP.
  • Federal Taxation: LPs are treated as pass-through entities for federal tax purposes, meaning profits and losses are reported on the partners’ individual tax returns.
  • Withholding Requirements: LPs with nonresident partners may be subject to California withholding requirements on distributions made to those partners.

Steps to Form a Limited Partnership in California

Step 1: Register with the California Secretary of State

Fill out the Certificate of Limited Partnership through the California Secretary of State's website, and submit via mail, in person, or online, and pay the $70 fee. Choose a name for the business. Below are some guidelines to follow:

  • Choose a unique name that is not registered with the California Secretary of State unless the company is given permission through the court or through acquisitions.
  • Check that the name is available using the business search on the Secretary of State's website.
  • The name has to end with: "Limited partnership", "L.P.", or "LP".
  • The business's name can't have terms such as corporation, incorporated, bank, insurance, corp, trustee, inc., or trust.

Out-of-state applicants must fill out a Foreign Limited Partnership Application for Registration form, and pay $800 in annual taxes to California. The form can be found on the Secretary of State's website.

Step 2: Prepare a Partnership Agreement

A partnership agreement is not required, but recommended to prevent possible problems.

Step 3: Get Local Business License and Comply With Local Laws

Laws and requirements may differ by jurisdiction. Information can be found at the CAlGold Business Permits website.

Step 4: Obtain an Employer Identification Number (EIN)

An EIN is obtained through the IRS. Visit the IRS website for EIN information and application.

Step 5: Pay California Limited Partnership Taxes/Fees

Limited Partnership tax information can be found on the California Legislative Information website.

Dissolving a California Limited Partnership

Dissolution occurs when an LP decides to cease operations and formally terminate its legal existence. The process includes:

  1. Vote to Dissolve: The general partner typically initiates the dissolution based on terms in the partnership agreement.
  2. Filing the Certificate of Cancellation (Form LP-4/7): Submit this form to the Secretary of State once the LP has wound up its affairs.
  3. Winding Up Affairs: Settle debts, distribute remaining assets, and notify creditors.
  4. Final Tax Return: File a final California tax return and indicate that it is the final return for the partnership.
  5. Cancel EIN and Licenses: Notify the IRS and relevant agencies to cancel the partnership’s EIN and any business licenses or permits.

Failure to dissolve properly can lead to continued tax obligations or administrative dissolution by the state.

Common Mistakes to Avoid When Forming a California LP

When forming a California limited partnership, avoid these common missteps:

  • Failing to File Required Documents: Not submitting the Certificate of Limited Partnership or forgetting biennial Statements of Information can result in penalties or suspension.
  • Improper Use of Name: Using prohibited words or failing to include “LP” or “Limited Partnership” in the business name can delay approval.
  • Neglecting a Written Agreement: Without a detailed partnership agreement, disputes may arise over profit sharing, authority, or dissolution terms.
  • Incorrectly Classifying Partners: Limited partners who engage in management risk being reclassified as general partners and losing liability protection.
  • Overlooking Local Permits: Many municipalities require local business licenses, which must be secured before operating.

Frequently Asked Questions

  1. What is the minimum number of partners in a California limited partnership?
    A California LP requires at least one general partner and one limited partner.
  2. Do I need a written partnership agreement for a California LP?
    While not legally required, a written agreement is highly recommended to clarify roles, contributions, and profit distribution.
  3. How much does it cost to start a California limited partnership?
    The formation fee is $70, with an additional $800 annual franchise tax. Other costs may include name reservation and local permits.
  4. Can a limited partner be held personally liable?
    Generally no, unless they participate in management or violate their limited role under state law.
  5. How do I dissolve a California limited partnership?
    File a Certificate of Cancellation with the Secretary of State, settle debts, distribute assets, and file final tax returns.

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