The way a business is conducted depends on the entity used to conduct it. There are several entities one can form in order to conduct a business. One common entity used to conduct a business is a partnership. The formalities for creating a partnership are dependent on what type of partnership a person decides to form. A partnership can be formed either as a general partnership or as a limited partnership. The purpose of this article will be to provide information on partnership entities and their formation.
What is a General Partnership?
A partnership is defined as an “association of two or more persons to carry on as co-owners a business for profit.” Cal. Corp. Code § 16101(10). A general partnership is made up of only general partners, and each general partner is jointly and severally liable for the partnership. This means that a general partner is liable for the obligations of the general partnership.
A formation of a general partnership requires no formalities other than the decision for two or more people to associate together to carry on a business for profit. Cal. Corp. Code § 16101(10). Indeed, two persons need not even have the intent to create a partnership for a general partnership to be formed; all that is needed is an agreement for two or more persons to associate with one another to conduct a business.
How is a General Partnership Created?
The formation of a General Partnership is very simple. In fact, there are no formalities required when creating a general partnership. A general partnership is created once two more persons decide to associate together in order to conduct a business for profit. In fact, although it is a common practice to create a partnership agreement, a partnership agreement can be implied, and if created, the agreement need not be in writing. (Corp. Code § 16101(9).) Although a partnership agreement may be helpful to evidence the agreement between partners and designate the authority of the partners.
For example, “Bob” and “Jill” made an agreement to work together to conduct a laundromat business and share the profits of the business. During the business, Jill was given the authority to negotiate a contract with the “Supplier.” Jill then entered into a contract with the Supplier. Here, Jill and Bob created a general partnership, meaning that Bob and Jill are both jointly and severally liable for the obligations of the partnership. Although Jill was the one who entered into the contract with the Supplier, Bob is still liable under the contract because he is a general partner that is liable for the obligations of the laundromat business.
What is a Limited Partnership?
A limited partnership is a partnership made up of both general partners and limited partners. The difference between general partners and limited partners is that limited partners are partners with limited liability, meaning that limited partners are typically not liable for the obligations of the partnership unless they are involved in the control of the business. (Corp. Code § 15903.03(a).) Limited partners are limited in their participation in the business and the authority they are able to exercise on behalf of the business. Being that they are limited in control of the business, limited partners are also limited in their liability to the partnership. However, in order to form a limited partnership or a limited liability partnership, one must register their partnership with the California Secretary of State.
Moreover, while a general partnership is governed by the 1994 Partnership Act, a limited partnership in California is governed by a set of statutes passed by the California Legislature. Specifically, since January 1, 2010, the Uniform Limited Partnership Act of 2008 has set forth the rules for all Limited Partnerships. Cal. Corp. Code § 15912.06(b).
How Do You Create a Limited Partnership?
The formation of a limited partnership requires more formalities than that of a general partnership. Whereas a general partnership is created once two or more people associate to carry on a business, the limited partnership is created once a Certificate of the Limited Partnership is filed with the California Secretary of State. (Corp. Code § 15902.01(a).) This Certificate is called an LP-1 form. The LP-1 form asks for standard information, including the names, identities, and addresses of the general partners of the partnership. § 2.03 Type Of Business Entity, MCACL § 2.03.
Moreover, under the 2008 Limited partnership Act, partners are required to enter into a partnership agreement either before or after filing the LP-1 form with the Secretary of State. Cal. Corp. Code § 15902.01(a). However, much like a general partnership, a partnership agreement for a limited partnership can be oral or implied. Cal. Corp. Code § 15901.02(x). Therefore, as opposed to a general partnership, the mere action of two more people conducting a business does not create a limited partnership.
For example, “Bob” and “Jill” agree to work together to start a swimsuit business. They agreed that Bill would run the entire business and Jill would contribute some of her money to the business, but that they would share the profits of the business. In fact, Jill was barely involved in the management of the swimsuit business. After some time, a Supplier initiates a lawsuit against Bob and Jill’s swimsuit business under a contract that was entered into by Bob. If Jill argues that she could not be held liable for the contract because her little involvement in the business made her a limited partner, this argument will not work. Bob and Jill made an agreement to associate together to carry on the swimsuit business. They never filed a Certificate of Limited Partnership with the Secretary of the State, and therefore a general partnership was created, not a limited partnership. Therefore, Jill is a general partner, and she would be held liable under the contract.
Partnerships are already fairly common in California. But the commonalities of partnerships formed without significantly advanced thought mean that they frequently lead to complicated liability questions. A partnership can be very difficult and require substantial time, money, and legal effort to unwind, they should be formed only after a deliberate and thoughtful approach.
As each case is unique, business owners would be well-served to seek experienced counsel familiar with the ins and outs of partnerships. At Underwood Law, our knowledgeable attorneys are here to help. If you are concerned about a partnership dispute, please do not hesitate to contact our office.