How Are Business Partnerships Formed Under California Law?
Under California law, a partnership is a type of business structure formed when two or more persons agree to carry on a business as co-owners for profit, regardless of whether they intend to form a formal partnership.
The term “persons” in a partnership can include individuals and business entities, meaning when two or more parties agree to work together to earn money for an ongoing business enterprise, they are considered partners with all associated rights and duties.
What Are the Different Types of Partnerships?
There are two main types of partnerships under California law: general partnerships and limited partnerships.
General Partnership
A general partnership is relatively simple to form. It is created when two or more persons come together to conduct business. Key characteristics include:
- Personal liability: Each partner is personally liable for the debts of the business.
- Profit sharing: Partners are entitled to an equal share of the profits.
- Contract authority: Either partner can enter into contracts on behalf of the partnership unless otherwise agreed.
The main risk of a general partnership is that partners are jointly and severally liable for all business debts. Therefore, having a partnership agreement is essential to protect assets and mitigate risks.
Limited Partnership
A limited partnership requires the filing of a Certificate of Limited Partnership with the California Secretary of State. In a limited partnership:
- General partners manage the business and retain personal liability.
- Limited partners make a passive financial investment and have no personal liability for the business’s debts.
Limited partners must avoid involvement in daily management to maintain their limited liability status.
Why Is a Partnership Agreement Important?
A partnership agreement is a legally binding document that outlines the roles, responsibilities, and obligations of each partner. It should cover:
- Distribution of profits and losses.
- Each partner’s role in the business.
- Provisions for termination or dissolution of the partnership.
- Terms for transferring interests in the partnership.
While not required, a partnership agreement is recommended to avoid disputes and litigation by clearly establishing the expectations and duties of all partners.
How Can Proper Planning Mitigate Legal Issues?
Proper planning, including drafting a partnership agreement, helps mitigate legal issues that may arise in the future. At TONG LAW, our Oakland business law attorneys can assist with all aspects of establishing a business partnership and help you protect your interests.
Author Bio
Vincent Tong is the CEO and Managing Partner of TONG LAW, a business and employment law firm located in Oakland, CA. Vincent is a fierce advocate for employees facing discrimination and wrongful termination. With several successful jury trial victories and favorable settlements, he has earned a strong reputation for delivering exceptional results for his clients.
In addition, Vincent provides invaluable counsel to businesses, guiding them on critical matters such as formation and governance, regulatory compliance, and protection of intellectual property assets. His depth of experience allows him to anticipate risks, devise strategies to avoid legal pitfalls, and empower clients to pursue their goals confidently.
Vincent currently serves as the 2021 President of the Board of Directors for the Alameda County Bar Association and sits on the Executive Board for the California Employment Lawyers Association. Recognized for outstanding skills and client dedication, he has consecutively earned the Super Lawyers’ Rising Star honor since 2015, reserved for the top 2.5% of attorneys. He also received the Distinguished Service Award for New Attorney from the Alameda County Bar Association in 2016. He is licensed to practice before all California state courts and the United States District Court for the Northern and Central Districts of California.