What is a California General Partnership?
A California general partnership is a simple and intuitive concept. When two or more people own and operate a business without a formal corporate structure, they are a general partnership. Put another way, a California general partnership is very similar to a two-or-more-person version of a sole proprietorship; a business that has not filed articles of incorporation or articles of organization with the California Secretary of State to become a California corporation or a California limited liability company, respectively. In California, a general partnership is one of the least expensive ways to start up a business for two or more individuals.
Here are few basics about California general partnerships:
No Formal Agreement is Needed for California General Partnership
A California partnership can exist without any formal written agreement. California courts will recognize a partnership that is based on an oral agreement, based on course of conduct or based on some combination thereof.
How are California General Partnerships Formed?
As said, all that is required is that the partners agree in writing, orally, or via course of conduct to own and run a business.
What Papers Have to be Filed for a California General Partnership?
If desired, partners can file a “Statement of General Partnership Authority.” The partnership is probably using a fictitious name for the business and, if so, the partnership must file and publish a “Fictitious Business Name Statement” with the county. There is also a “Withdrawal From Partnership Statement” that can be filed with the county.
What About Bank Accounts, Licenses, Permits, and FEINs for a California General Partnership?
A California general partnership can apply for and obtain a federal taxpayer identification number (“FEIN”) by completing IRS Form SS-4. Likewise, an eligible partnership can obtain local city business licenses, permits, etc.
What About Tax Filings for a California General Partnership?
A partnership must file forms with state and federal taxing authorities.
Profits and Losses are Personal in a California General Partnership
All income and losses from the business are shared by the partners. Any income or losses shown on the California general partnership tax filings will be “passed through” to the partners.
Each Partner is Jointly and Severally Liable for Debts of California General Partnership
All of the partners are each 100% personally liable (jointly and severally) for the business debts, obligations, and liabilities of the California general partnership.
Each Partner is Empowered to Manage the California General Partnership
In general, each partner has the power to do all of the tasks necessary to run the business including:
- Sign contracts;
- Sign checks, receive and deposit money;
- Sign leases;
- Make purchases for the business;
- Sell assets of the business; and
- Take out a loan
This is an advantage, but also a risk. Any partner can unilaterally bind the California general partnership and all of the other partners to a contract with or without knowledge or consent of the other partners.
A California General Partnership Functions Best When
As a general rule, a California general partnership works best when three conditions are met:
- When the partners are devoting equal time AND equal resources like money or property to the partnership;
- When the partners are actively managing the business affairs of the partnership; and
- When the partners are relatively equal in socio-economic status, community standing, and wealth — this is relevant because of the joint and several liability
A California General Partnership Should Evolve into a Corporate Structure When
Generally, as the California general partnership evolves, there are certain signs that it is time for the California general partnership to evolve into a more formal corporate structure. Such signs include:
- When the respective time commitments of the partners have become asymmetrical;
- When resources being committed to the partnership have become asymmetrical;
- When the partners’ respective personal and family wealth diverges; or
- When one or more of the partners need to avoid putting personal assets at risk to pay for the partnership’s debts and obligations
Because each partner is personally liable for 100% of the California general partnership’s debts and obligations, if one partner becomes significantly more wealthy than the other, he or she is more at risk. A creditor is much more likely to go after the partner with the most assets.
A Written Partnership Agreement is Important for a California General Partnership
It is important for a California general partnership to have a written partnership agreement. It does not have to be long or complex. However, potential future problems are best resolved now, when everyone is friendly and well-disposed towards one another.
Contact San Diego Corporate Law Today
If you would like more information about California general partnerships or if you need a well-drafted California general partnership agreement designed for your specific needs, contact attorney Michael J. Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has extensive experience in drafting California general partnership agreements and the other contracts and agreements necessary for running your business. Mr. Leonard can be reached by email or by calling (858) 483-9200.