California General Partnership LawBy Tom Speranza, J.D.
California General Partnership LawBy Tom Speranza, J.D.
Under California law, a partnership consists of two or more individuals who operate as co-owners of a for-profit business. The partnership exists whether or not the participants intend to form an official partnership.
Defining a General Partnership
In a general partnership in California, the partners are personally liable for the debts, obligations, and other liabilities of their business. If you are a partner in a general partnership in your individual capacity, and not through another entity, your personal assets (cars, bank accounts, homes, etc.) are at risk from claims, lawsuits, and liens arising from the partnership's business, including:
- Unpaid employees and consultants who provided services to the partnership
- Unpaid landlords who leased space to the partnership
- Unpaid suppliers and vendors who sold things to the partnership
- Customers of the partnership who demand refunds
- People injured at the partnership's place of business or by its products
- Federal, state, and local tax authorities seeking payment of back taxes
A written agreement signed by the partners enables them to structure their business arrangement to fit their particular situation. A well-drafted partnership agreement includes provisions about:
- How the partners will make business decisions, such as purchasing or selling assets, hiring or firing employees, signing contracts, and borrowing money
- The capital contributions required from each partner
- The process for admitting new partners
- The process for withdrawing from the partnership
- The death or disability of a partner
- The process for selling a partnership interest
- Dissolving the partnership
Partnership agreements are not required by law, but they're a good idea. In the absence of a partnership agreement, the partnership must follow the standard rules set out in the Uniform Partnership Act.
California Uniform Partnership Act
The Uniform Partnership Act (UPA) provides a set of standard rules that apply to all partnerships doing business in California.
Partnership Agreement Controls. If a partnership agreement provides guidance on a particular topic or legal issue, the partners must follow the agreement. If the partnership agreement doesn't cover an issue, the partners must follow the UPA.
Any Partner Can Act for the Partnership. Each partner has the power to act on behalf of and legally bind a general partnership. That means any partner can negotiate agreements and sign contracts for the partnership.
Statement of Authority. If a general partnership wants to place limits on which partners have legal authority for property or transactions located in California, it can file a statement of partnership authority, which officially states which partners can take certain actions. Any partner who files a statement of authority must provide copies to all other partners.
Partnership Property. Property or assets acquired in the partnership's name or using partnership funds are owned by the partnership, not by any individual partner.
Wrongful Acts of Partners. If a partner commits a wrongful act or omission and causes loss or injury to a third party while acting in the ordinary course of the partnership's business or with the partnership's authority, the partnership is liable for the third party's damages.
Partners Jointly and Severally Liable. All partners are jointly and severally liable for all obligations of the general partnership; however, a partner who is admitted to an existing general partnership is not liable for obligations incurred before admission.
All Partners Have Equal Shares. In the absence of a partnership agreement, partners have equal stakes in the business, and each partner has an equal right to manage the partnership's business.
Partners Have Fiduciary Duties. Partners owe a duty of care and duty of loyalty to the partnership and one another. A duty of care means that each partner must refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or knowing violations of the law. A duty of loyalty means that a partner must not compete with the partnership or take actions that might harm the partnership.
Transfers of Partnership Interests. If a partner transfers partnership interest, the general partnership does not end, but the transferee does not have a right to participate in the management of the partnership.
Partner Dissociation. A partner can dissociate from a general partnership, either by voluntary withdrawal or by involuntary expulsion, if they breach the partnership agreement, engage in other wrongful conduct, or die. Upon dissociation, a partner no longer has a right to participate in the management of the partnership. The partnership must buy out the partner's interest for a price based upon a formula found in the UPA.
While you don't have to file any formal paperwork when forming a general partnership in California, it's still important to have a written contract in place to determine how you're going to handle liability claims and pass-through taxation. With the assistance of an attorney, you can find out more about the legalities associated with a general partnership and the next steps to get your business up and running.
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