A California Limited Partnership (“California LP”) is a business entity that is particularly beneficial for businesses with a clear division between passive investors and active managers.

In this article, we will stick to the basics, but if you want to delve into the details of limited partnerships, their benefits, formation process, and key considerations, you might also enjoy this more in-depth article.

Understanding the Basics of a California Limited Partnership

A California LP constitutes two types of partners: General Partners and Limited Partners.

General Partners are involved in the day-to-day operations and are personally liable for the debts, liabilities, and obligations of the limited partnership.

Limited Partners, however, are passive investors who contribute capital but have limited involvement in management. Their liability is restricted to the extent of their investment in the limited partnership.

In California, a limited partnership is formed by filing a Certificate of Limited Partnership with the California Secretary of State. It is governed by the California Revised Limited Partnership Act and a written partnership agreement detailing the roles, responsibilities, and profit-sharing among the partners is also required.

While a limited partnership in California provides liability protection, a limited partnership does not offer the same level of protection as a California LLC, California corporation, or California S-Corp, as discussed further in this article.

Key Advantages of Operating as a California Limited Partnership

Operating as a California LP offers several notable advantages over other California business entity choices.

Limited Liability of California LP

The most significant advantage of a California LP is the limited liability offered to Limited Partners. A Limited Partner is liable only to the extent of their capital contribution, protecting personal assets from business debts and obligations.

Investment Opportunities for California LP

As a Limited Partner is essentially an investor, a limited partnership can be an attractive vehicle for raising capital. Passive investors are often more inclined to invest when their involvement in management is minimal, and their liability is limited.

Income Tax Benefits of California LP

California LPs enjoy pass-through taxation, meaning the profits or losses of the business pass through to the individual partners, avoiding double taxation. A more detailed discussion of income tax attributes of limited partnerships is discussed in this article.

Avoiding the California LLC Fee with a California LP

The California LLC Fee is an additional payment, calculated based on the gross income of a limited liability company, that can range from $900 to $11,790 annually. Unlike an LLC in California, a limited partnership is not subject to this extra financial burden, making a limited partnership potentially a more cost-effective alternative for California LLCs with gross receipts exceeding $250,000 annually.

In California, both limited partnerships in LLCs are obligated to pay a minimum annual franchise tax of $800.

Flexibility in Profit Sharing of California LP

In a California LP, profit distribution is not necessarily proportional to the percentage of ownership or investment as is required in a California S-Corp. The provisions within partnership agreements are customizable, giving great flexibility to the partnership agreement.

Disadvantages of Operating as a California Limited Partnership

While limited partnerships in California do offer numerous advantages, it is also crucial to understand the potential drawbacks associated with limited partnerships.

Personal Liability for a General Partner

One significant disadvantage is that while a Limited Partner enjoys limited liability, a General Partner is fully liable for the debts, liabilities and obligations of limited partnerships. This means that, unlike in a California LLC, California corporation, or California S-Corp, the personal assets of a General Partner are at risk.

Although a General Partner in a limited partnership faces personal liability, other business entities can be utilized to mitigate this risk. A California LLC, California corporation, or California S-Corp can be employed to act as a General Partner. In such arrangements, liability is limited as it is the corporate entity, and not the individuals behind it, that assumes the role of the General Partner.

Limited Control for Limited Partners

A Limited Partner has minimal control over business operations. They are essentially investors in limited partnerships and cannot be involved in the day-to-day management of the business without risking their limited partner status. This limited control can be a drawback for those who wish to be more engaged in the business.

Securities Law Requirements of California LPs

Membership Interests of a California LLC may or may not be classified as securities. Similarly, the interests of General Partners in a limited partnership in California may be deemed securities, dependent on specific circumstances.

However, the Limited Partner Interests of a limited partnership in California are always considered securities. As such, they are always subject to the securities laws of both California and the federal government.

Before issuing Limited Partner Interests, it is required to adhere to the federal and California registration, qualification, or exemption requirements, which involve making securities filings with applicable regulatory agencies.

The Role of General Partners and Limited Partners in a California Limited Partnership

In a California LP, both General Partners and Limited Partners play distinct roles.

A General Partner is typically involved in the day-to-day management and operations of the limited partnership. They make crucial business decisions and have management control over the operation of the California LP. However, they also bear full liability for the debts, liabilities, and obligations of the limited partnership.

On the other hand, Limited Partners are passive investors. They provide capital investment to the limited partnership but do not conduct business, maintaining a hands-off role. Consequently, their liability is limited to their investment in the California LP, and they cannot incur further debts, liabilities, or obligations beyond their capital contribution.

Taxation of a California Limited Partnership

While the California LP (taxed as a partnership for California and federal income tax purposes) does not pay income tax. The limited partnership must file annual informational returns on Internal Revenue Service Form 1065 and California Franchise Tax Board Form 565. These forms report the income, deductions, and other important financial information for income tax purposes, but the profits or losses are reported on the individual personal tax returns of the partners, not on the limited partnership itself.

For franchise tax purposes, a limited partnership in California pays a minimum annual franchise tax of $800.

How to Manage a California Limited Partnership

One of the most beneficial decisions to make when establishing a California LP is to use a California LLC, California Corporation, or California S-Corp to serve as the General Partner, mitigating the risks for individuals who act as the General Partner.

Let San Diego Corporate Law Form Your California Limited Partnership

If you are considering forming a limited partnership in California, reach out to us at San Diego Corporate Law. Our team of experienced and knowledgeable corporate attorneys can provide you with expert advice to navigate the complexities of formation, ensuring that your business is set up for success. Contact us today and take the first step towards successful business ownership.