When two or more small business owners or entities come together to form a business, they are sometimes perplexed as to whether to form a partnership, and exactly what type of partnership to form. To that end, the ladies of Smith Shapourian Mignano LLP discuss partnerships generally, and the three different types of partnerships in California.
In California, the Revised Uniform Partnership Act (RUPA) governs the formation, operation, and liquidation of all partnerships formed after January 1, 1999. A partnership is a business arrangement where two or more business owners or entities come together to form a business. Unlike a limited liability company (“LLC”), which can consist of a sole member, a partnership requires two or more owners or entities.
In California, one may file a Statement of Partnership Authority (Form GP-1) with the Secretary of State to register a general partnership. In a general partnership, each partner contributes money, (personal or real) property, labor, and/or other special skills to the partnership.
Each partner shares in the profits and losses from the business, and each partner may actively manage or control the business. This means that each owner has authority to make decisions about how the business operates, as well as the authority to make legally binding decisions on behalf of the business, absent some other specified arrangement in a partnership agreement.
Finally, there is no limit on each partner’s personal responsibility for the debts of the business. This means that each partner could lose more than just his or her investment in the business, and that each general partner’s personal assets could be accessed to pay business debts. Each general partner is "jointly and severably" liable for debts of the business.
In California, one may file a Certificate of Limited Partnership (LP-1) with the Secretary of State to register a limited partnership. Unlike a general partnership, a limited partnership may include both limited and general partners. The partnership agreement will likely specify exactly which of the partners are general partners versus limited partners.
A limited partner is one who does not assume responsibility for the debts of the partnership. Therefore, the most a limited partner risks is his or her investment in the business. However, the limited partner lacks management control and/or authority to operate the business. For this reason, the limited partner is often regarded as a passive investor in the business.
A limited partnership must have at least one general partner, who is responsible for operating the business and controlling the day-to-day affairs of the business. As discussed above, the general partner has the authority to make legally binding business decisions on behalf of the partnership. General partners are subject to unlimited personal liability for the debts of the business, and are jointly and severably liable for the debts of the business.
Limited Liability Partnership
In California, one may file an Application to Register a Limited Liability Partnership (LLP-1) with the Secretary of State to register a limited liability partnership (“LLP”).
In an LLP, all the partners receive limited liability protection, and all the partners can take an active role in managing the day-to-day affairs of the business. The partners will likely articulate the structure of the organization and the distribution of profits and losses in a partnership agreement.
Most notably, the LLP form of ownership is limited in the State of California to persons licensed to practice in the fields of public accountancy, law, or architecture. In addition, pursuant to the recently chaptered SB 284, engineers and land surveyors are also included in the professions that can be formed as an LLP until January 1, 2019.
Smith Shapourian & Mignano, LLP is available to answer any questions or concerns you may have regarding forming a partnership for your business. Please feel free to contact us for a consultation.
This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.