What is a California Limited Partnership?
In simple terms, a California limited partnership is a partnership with one or more partners who are “limited” in terms of management and liability. A California limited partnership can be best understood in comparison to a California general partnership.
California General Partnership: Joint And Several Liability for 100% Of Losses, Debts, and Liabilities
As we wrote recently, generally speaking a California partnership is a simple and intuitive concept. A California partnership exists when two or more people own and operate a business without a formal corporate structure.
Three key aspects of a California general partnership are that the partners
- Share in the management
- Share equally in the profits and losses
- Each partner is 100% personally liable for the business debts, obligations, and liabilities — that is, joint and several liability among partners
The third aspect is the key to understanding California limited partnerships. Joint and several liability is the legal concept that a creditor of the California partnership can seek recover in a lawsuit against any single partner for the full 100% of the debt. In other words, the creditor can “pick and choose” the “best” partner, the partner with the most assets and the most liquid assets. Maybe both partners have a net worth of $2 million, but one partner has the money tied up in his or her house, whereas the other has $2 million in cash in the bank. A creditor is going after the cash.
Please understand that “creditor” is being used in the broadest sense here. Debts and liabilities do not flow just from loans and financing documents. Commercial lease and vendor contracts can create debts and liabilities if the partnership fails to pay the rent or pay for the goods delivered. Likewise, employee wages and salaries will create obligations if they go unpaid.
California Limited Partnership: The Limited Partner is NOT Jointly and Severally Liable
California limited partnerships are formed when you want to make any given partner NOT jointly and severally liable. Under a California limited partnership, the limited partner is only liable for the partnership debts, liabilities, and obligations up to the amount of his/her/its investments. And, yes, corporate entities can join and form California partnerships and California limited partnerships.
Formal Filing Necessary for California Limited Partnerships
Unlike forming a California general partnership, to form a California limited partnership, an official filing must be made with the Secretary of State. This serves the purpose of putting creditors on notice that only the general partner(s) are jointly and severally liable.
The “official filing” is what is called a Certificate of Limited Partnership. with the California Secretary of State. See Cal. Corp. Code § 15902.01.
California General Partnership: All Partners Manage Business and Each can Bind the Others
The first key aspect of a California general partnership, in which all the partners manage the business, is that each partner, alone, has the authority to do all of the tasks necessary to run the business including signing contracts and taking out a loan. Importantly, each partner can undertake these tasks without the prior knowledge and/or consent of the other partners. Obviously, this might cause tremendous conflict among the partners, but the partners are still legally bound.
In this respect, California limited partnerships are different.
California Limited Partnership: Limited Partners do Not Manage the Business
In a California limited partnership, the limited partners take no role in managing the business. This follows from the idea that a partner who has limited financial liability should not be able to bind the other partners to debts and obligations.
A Written California Limited Partnership Agreement is Strongly Suggested
Although a written California limited partnership agreement is not legally required, practically speaking, it is necessary and should be drafted by an experienced business attorney.
Contact San Diego Corporation Law Today
If you would like more information about California limited partnerships and drafting California limited partnership agreements, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email.