Setting Up a Partnership in California
Setting up a partnership in California is a relatively easy and inexpensive endeavor. To start, you will need to choose a name for your business.4 min read
2. Do You Need a Business License?
3. What Types of LLPs Will Phase Out in 2019 In California?
4. Do LLPs Have to Pay an Annual Minimum Tax?
5. Understanding the Importance of a Partnership
6. Steps for Setting Up a Partnership
7. Difference Between Partnership and Sole Proprietorship
Setting up a partnership in California is a relatively easy and inexpensive endeavor. To start, you will need to choose a name for your business. General partnerships often choose to operate under a fictitious business name, which is any name other than the legal owner's names. To operate under a fictitious name, you must file a fictitious business name statement with the county clerk. To ensure the name is available, you should go to the California Secretary of State website and check for name availability.
Benefits of a Partnership Agreement
Drafting a partnership agreement is not a mandatory legal requirement in California. However, a well-written partnership agreement can be beneficial in clearly defining the purpose, responsibilities, and functions of the partnership. It should clearly describe how profits would be distributed, how new partners may be added, the dissolution process, and other functions of the operation.
Do You Need a Business License?
You will need to apply for a required business license to conduct business. Each year, you will be required to file a form 1065 with the Internal Revenue Service, IRS. In addition, you must file Form 565 and pay the Limited Liability Partnership Annual Tax with the state of California.
If your limited liability partnership, LLP, is providing professional services, you may be required to have a professional state license. You can find more information on professional services by clicking here.
What Types of LLPs Will Phase Out in 2019 In California?
Any of the above-mentioned entities that are operating as LLPs in California will be phased out. When applying for a limited liability partnership, you must submit an Application to Register a Limited Liability Partnership. The application will require you to provide the limited liability partnerships name and its place of formation.
If the mailing address differs from the place of formation, a principal office mailing address is required. In addition, you will be asked to describe the type of business you will engage in and list a registered agent for service of process.
Do LLPs Have to Pay an Annual Minimum Tax?
LLPs that are formed or conduct business in California are required to pay an annual minimum tax, although a common misconception is that LLPs do not have to pay annual taxes. The current annual minimum tax in the state of California is $800. If your LLP's income is over a certain amount, which is currently $250,000, the partnership will pay an additional income-based tax. The tax is paid to the California Franchise Tax Board and is based on income. Naturally, as the income amount rises, so does the franchise tax.
After the close of your LLP's tax year, you will file a Partnership Return of Income form, Form 565, by April 15th. The form can be found by clicking here.
In addition, if you pay more than $100 in wages in any quarter, you will be subject to California's payroll tax. Numerous additional regulations and requirements will also apply once you have met payroll-tax status.
Understanding the Importance of a Partnership
Partnerships are not to be taken lightly and are often compared to a marriage. A sustainable marriage requires commitment, hard work, and effort to successfully work through disagreements and remain healthy. So it is with a partnership and it is key that all partners share the same vision.
Steps for Setting Up a Partnership
At the initial start of formation, partners should decide and agree on a name for the business. All partners should agree on and define what each partner's role will be in regards to what they will contribute in terms of expertise and responsibility. Clearly defining roles will serve to define who will have the authority to enter contract negotiations and make important business decisions.
In addition, it is always good to discuss how disagreements will be resolved. A well-written partnership agreement can help to address many of these issues and serve to offer resolutions for misunderstandings.
Difference Between Partnership and Sole Proprietorship
A business operating as a general partnership in California is similar to that of a sole-proprietorship. The biggest difference is that the sole-proprietorship involves just one person making business decisions. A general partnership can have additional benefits, such as having someone to share in the startup cost and having the additional expertise available to offer input. Another benefit with general partnerships is that the structure allows for flexibility. Partners can choose how each person will be involved in the management of the business.
If you need help with setting up a partnership in California, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.