1. What is a general partnership? (Top)
A partnership is an association of two or more persons who carry on as co-owners of a business for profit. Corp C §16101(9).
2. What sort of business may form a general partnership? (Top)
There is no general restriction on what type of business may form a general partnership as opposed to a limited liability company or professional corporation which do restrict the type of business which may use that business structure.
3. How is a general partnership formed? (Top)
Generally speaking, nothing has to be filed with a governmental agency in order to create a general partnership since a partnership is formed when the two or more persons make a written or oral agreement to operate a business. This is in contrast to a corporation or limited liability company, in which the business organizers must submit an application to the appropriate governmental agency for formation purposes.
4. How is a general partnership managed and controlled? (Top)
Unless the partnership agreement provides otherwise, all partners have equal rights to manage and conduct partnership business. Corp C §16401(f). Consequently, each partner is an agent of the partnership and can bind the partnership in its ordinary course of business Corp C §16301(1). For example, Paul may buy automotive parts for his mechanic shop even if his other partner, Peter, objects.
5. How are profits and losses shared amongst the partners? (Top)
Unless the partnership agreement provides otherwise, all profits and losses are shared equally amongst the partners. Corp C § 16401(b).
What is particularly important about this is the fact that you can contribute 90% of the capital and be entitled to only 50% of the profits if there is no general partnership agreement. Thus, Corp C § 16401(b) underscores the importance of drafting a partnership agreement that fits the capital contribution structure of the partnership, otherwise one partner will most likely end up very unhappy when pay day rolls around.
6. What are some of the advantages of a general partnership? (Top)
A general partnership, unlike a limited liability company or a corporation, is not required to to pay a minimum annual franchise or privilege tax to the State of California. The annual franchise fee for a limited liability company and corporation is $800. Instead, the only fees required of a general partnership relating to its organization are those for filing a fictitious business name statement if it conducts business under a fictitious name, recording a statement of partnership or obtaining a license or permit for a specific type of business activity.
7. What are some of the disadvantages of a general partnership? (Top)
The primary disadvantage of a general partnership is the fact that the partners are personally liable for partnership debts. Corp C §16306. For instance, if Peter and Paul owed $75,000 to a creditor, for example American Express, the creditor could pursue not only the assets in the general partnerships but also the personal assets of Peter and Paul. Thus, Peter and Paul could lose their house, car, bank account and any other financial asset should the general partnership not have enough assets to satisfy the debt.
Personal liability is a very dangerous proposition because one mistake can wipe out an entire life’s worth of assets. Therefore, most people who are interested in forming a business stray away from a general partnership if the business will involve any type of lawsuit risk such as automotive repair, construction, plumbing, etc.
8. What is a limited partnership? (Top)
A partnership with one or more "limited partners," partners who do not participate in the control of the business and who are not personally liable for the obligations of the partnership, and one or more "general partners," partners who actively engage in the management and control of the business and who have unlimited personal liability for the obligations of the partnership. Corp C §15901.02(q).
9. How common are limited partnerships? (Top)
Somewhat uncommon, since there are other business entities, such as Limited Liability Companies and Limited Liability Partnerships, which provide superior attributes at little or no additional cost or administration.
10. What is a Limited Liability Partnership? (Top)
An LLP is a form of a partnership in which the liability of each partner is limited. This means that the partners will not be personally liable for partnership debts unlike Peter and Paul in the answer to Question 6. However, California law only authorizes LLPs for lawyers, accountants, and architects and foreign LLPs (out-of-state business) to do business in California. Corp C §§16951-16962.
11. How are partnerships accounted for in estate planning? (Top)
The common mechanism used in estate planning for partnerships is the buy-sell agreement. In a typical buy-sell agreement, each partner agrees to buy out the other partner’s interest in the partnership upon their death in order to facilitate a continuity of control of the business. Commonly, each partner will procure a life insurance policy for the other partner payable to the purchasing partner’s family such that the purchasing partner’s family has enough money to purchase the partnership interest of the decedent partner at death. It sounds complicated but its not.