A partnership agreement California is formed whenever two or more people create a profit-oriented business, even if there isn't an intent or written plan to do so. There is no registration requirement or formal filing that needs to be completed in order to form a partnership. Partnerships are required to comply with filing, registration, and tax requirements applicable to any form of business.

Types of Partnership

A partnership is a formal arrangement in which two or more parties cooperate in managing and operating a business. There are three types of partnerships:

  1. General partnership: All the partners or owners are on equal ground because they have the same responsibilities and rights. Therefore, each owner may act on behalf of the business as a whole. All owners share in the losses and profits of the business. Joint and several liability occurs when each individual owner is personally responsible for any actions taken by other partners.
  2. Limited partnership: A limited partnership is similar to a general partnership, except that while a general partnership must have at least two general partners, a limited partnership must have at least one general partner and at least one limited partner. The general partner(s) are responsible for managing the company and have the same responsibilities and rights as the partners in a general partnership, which includes joint and several liability. The limited partner contributes capital toward the equity of the company but is not involved in the daily operations of the business. They can be thought of as playing the role of a silent partner. A limited partner benefits from not being personally liable for the actions taken by the general partner(s) or partnership.
  3. Limited liability partnership(LLP): An LLP is considered a blend between a corporation and a partnership. Beyond the assets that were invested in the partnership, none of the partners may be held personally responsible for the actions of other parties. Each partner may decide on how much they'd like to be involved in the daily operations of the business and also how much capital they'd like to contribute. LLPs are usually formed by registering with the state and through a written agreement between the partners. LLPs may be reserved in some states to professional partnerships, such as for accountants and lawyers.

Pros and Cons: General Partnership

Benefits of forming a general partnership include:

  • Low startup costs
  • Simplified taxes
  • Decreased paperwork

Disadvantages of forming a general partnership include:

  • Shared management
  • Joint and several liability
  • Less appealing to investors

Pros and Cons: Limited Partnership

Benefits of forming a limited partnership include:

  • Tax benefits
  • Appealing to investors
  • Limited liability for all limited partners

Disadvantages of forming a limited partnership include:

  • Divided authority
  • Additional paperwork
  • Joint and several liability for general partners

Pros and Cons: Limited Liability Partnership

Benefits of forming an LLP include:

  • No double taxation
  • Additional flexibility for partners
  • Limited liability for all partners

Disadvantages of forming an LLP include:

  • Tax limits in certain states
  • Use is controlled by some states
  • Additional paperwork required through formal filing requirements

Drafting and Signing a Partnership Agreement

It is not required by law to create a partnership agreement for establishing a partnership, but it provides a significant benefit in ensuring all parties agree to the terms. A well-written partnership agreement should assist in advising how to handle disputes and other difficult situations. A partnership agreement should cover the following topics:

  • Dispute resolution
  • Each partner's capital contributions
  • Voting rules
  • Allocation of losses, draws, and profits
  • Steps to admit or withdrawal partners

Honest and well-intentioned partners may find themselves in the heat of a legal battle if a written partnership agreement is not created. Should conditions or circumstances change a partnership agreement, it can always be changed or amended at a later date.

What Is a Partnership Agreement?

A partnership agreement may also be known as:

  • Business partnership agreement
  • General partnership agreement
  • Articles of partnership
  • Partnership contract

A partnership agreement is made between two or more business partners and addresses the responsibilities, profit and loss allocations, withdrawals, capital contributions, financial reporting, and other rules or guidelines of the business. A partnership agreement will display unmistakable intentions by all partners to form a partnership. The importance of a partnership agreement is illustrated in the dispute resolution process.

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