Partnership Agreement California: Key Legal Requirements

Key Takeaways

• A general partnership in California is formed automatically when two or more people carry on a business for profit, with or without a written agreement.
• The California Revised Uniform Partnership Act (RUPA) governs partnerships and introduces important legal concepts like “dissociation.”
• A partnership agreement is highly recommended and should cover ownership, contributions, dispute resolution, and management duties.
• California law allows but does not require partnerships to operate under a fictitious business name (FBN), which must be registered locally.
• Partnerships must comply with tax obligations, licensing requirements, and may need to obtain an EIN and business insurance.

California Revised Uniform Partnership Act is the version of the Revised Uniform Partnership Act (RUPA) that California has adopted. This statute was proposed by the National Conference of Commissioners on Uniform State Laws (NCCUSL) to govern business partnerships formed in each state.

General Partnership

A business owned and run by two or more people who haven't filed Articles of Incorporation is called a general partnership. The least expensive and simplest way to start a business with one or more partners (in the short term at least) is by forming a general partnership.

A general partnership doesn't require a written agreement even though it's highly advised that you and your partners have one. It also doesn't require you to file paperwork even though filing a written statement of general partnership is good form. Furthermore, minutes of meetings aren't required.

Other kinds of businesses have several advantages. The major advantage is the protection of individuals' assets from liability. However, several business owners have recently shown a preference for partnerships because they're easily created and are highly adaptable.

Forming a Partnership in California

To form a general partnership in California, no formal registration with the Secretary of State is required. However, business owners must still follow key legal and procedural steps, including:

• Choose a partnership name: You may use the partners' surnames or a fictitious business name (FBN), often referred to as a “doing business as” (DBA) name.
• Check for name conflicts: Conduct a name search with the California Secretary of State and the U.S. Patent and Trademark Office to avoid trademark infringement.
• Register the FBN: If you choose a fictitious name, file a Fictitious Business Name Statement with your county clerk and publish the notice as required by law (Cal. Bus. & Prof. Code § 17917).
• Get an EIN: Obtain an Employer Identification Number from the IRS, which is necessary even if the partnership has no employees.
• Register for taxes: Depending on the nature of the business, you may need to register for payroll taxes with the California Employment Development Department (EDD) or for sales and use tax with the California Department of Tax and Fee Administration (CDTFA).
• Obtain licenses and permits: Use CalGold (www.calgold.ca.gov) to identify state, local, and professional licenses applicable to your business.

Partnership Agreements

Though the law of California doesn't demand a written partnership agreement, it's substantially risky to rely on unofficial, verbal agreements in partnerships. If interested parties decide to enter into a partnership, it's absolutely in their best interest to write a partnership agreement. Well-composed partnership agreements ensure the avoidance of future misinterpretations of each member's intentions. Sometimes, members of a partnership depend on California's default governing guidelines for partnerships without knowing that several of the default provisions, unlike those outlined in a custom partnership agreement, are unsuitable for their business goals.

Legal Benefits of a Written Partnership Agreement

Even though a written agreement isn’t legally required to create a partnership in California, having one in place helps protect all partners. A written agreement:

• Clarifies business expectations and responsibilities.
• Prevents reliance on California’s default provisions under RUPA, which may not align with your business goals.
• Reduces the risk of legal disputes by specifying how profits, losses, and authority are shared.
• Can include provisions for arbitration or mediation to avoid court litigation.

You should revisit and revise your agreement as your business grows or changes.

Contents of a Partnership Agreement

Usually, different members of a company devote different amounts of time to their partnership. Some members keep their full-time jobs and give their partnership a few hours after their regular day jobs. Others are members of more than one partnership. Therefore, a well-composed partnership agreement is required to state whether such options are allowed. A properly written partnership agreement specifically defines the following:

• Every partner's percentage ownership.
• The grounds for each member's ownership interest (such as sweat equity, cash investment, or both combined).
• Whether or not the partnership's interest is vested.
• How to share the profits and losses between partners.
• The circumstances under which the partnership should distribute or reinvest profits.
• Whether any or all of the partners should be paid salaries.
• Whether any contributions should be used as loans.

A well-composed partnership agreement also covers the need for extra capital in future. It states whether the members should make additional investments to raise more capital if that's needed to keep the company running, or whether the company should be dissolved if the initial investment turns out insufficient to achieve the company's financial goals. It's best to plan ahead with the worst case scenario in view in order to avoid pitfalls.

A partnership agreement also specifically states how disputes should be resolved whenever they arise in a partnership. It also provides a means of settling deadlocks through mediation or arbitration, which assists in preventing prolonged lawsuits.

Partnership Dissociation and Termination Under RUPA

Under the California Revised Uniform Partnership Act, a partner may dissociate (withdraw) from the partnership without necessarily triggering its dissolution. This flexibility allows the partnership to:

• Continue operating after a partner leaves.
• Purchase the departing partner’s interest without dissolving the business.
• Avoid termination unless a majority vote of partners determines to dissolve.

However, if dissociation results in only one remaining partner, the business is no longer considered a partnership under the law. Partners may need to file a Statement of Dissociation with the Secretary of State for legal clarity.

The Effect of RUPA on Partnerships

The Revised Uniform Partnership Act presents a more adaptable structure that focuses on the interest of the individual partner and makes the partnership a body that exists independently from its members. RUPA makes it possible for a partnership to continue to function after a partner leaves the company. This is possible through “dissociation,” the departure or firing of a member while the partnership continues to function.

The California Revised Uniform Partnership Agreement Act requires all partners to be entitled to an equal level of control and management of the partnership and an equal share of its profits, losses, assets, and liabilities.

Limited Partnership Agreement

Limited partnership agreements, which are meant for limited partnerships are formed in such a way that allows only one general partner to supply funding and management for the business while the other partners contribute to the capital of the organization without partaking in its management.

Differences Between General and Limited Partnerships

General partnerships and limited partnerships differ in liability exposure and formation requirements:

A limited partnership is suitable when investors want to fund the business but not manage it or assume liability.

Sharing Profits

The profits of a California limited partnership are usually shared according to the percentage of each member's investment. However, the members can choose to share their profits any way they please.

One of the major reasons LLCs are preferred by individuals is that this structure allows them to sidestep general liability. While companies are accountable for their obligations and debts, their members also still shoulder such responsibilities if the company isn't properly organized and funded or if it has defrauded its customers.

Ongoing Compliance for California Partnerships

Once your partnership is active, ensure ongoing legal compliance through:

• Annual tax filings: File California Form 565 and issue Schedule K-1 to each partner.
• Business insurance: General liability insurance can protect personal assets from lawsuits or claims against the partnership.
• Recordkeeping: Maintain financial records, agreements, and licenses for audits and legal protection.
• Separate banking: Open a business bank account to keep personal and business finances distinct. This also helps demonstrate that the business is separate from individual partners for legal liability purposes.

Frequently Asked Questions

1. Do I need a written partnership agreement in California?
   No, but it is highly recommended. A written agreement helps avoid disputes and allows partners to define their own rules rather than rely on default state law.
2. What happens if a partner leaves the partnership?
   Under RUPA, the partnership does not automatically dissolve. The remaining partners can continue the business, and the withdrawing partner is dissociated.
3. Do I need to register my partnership with the state?
   Not for general partnerships. However, you may need to register a fictitious business name, obtain an EIN, and comply with tax and licensing rules.
4. How are profits taxed in a California partnership?
   Profits are passed through to individual partners, who report income on their personal tax returns. The partnership must file Form 565 with the California FTB.
5. Can limited partners manage the business?
   No, in a limited partnership, only general partners are allowed to manage. Limited partners are passive investors.

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