The law defines a general partnership as an association of two or more persons who carry on business with the aim of making profit. The term “persons” generally includes not only individuals, but also other business entities. Most partners sign a formal partnership agreement, setting out their respective rights and obligations; however, this isn't necessary, as a partnership can operate on nothing more than a handshake. Title 2 of the California Corporations Code sets out the law relating to general partnerships in the state.
California regulations do not require a general partnership to file documents with the Secretary of State. General partners may, if they choose, file a statement of partnership authority -- California Secretary of State Form GP-1 -- to specify the authority of each individual partner to enter into partnership transactions. The partnership should thereafter advise the Secretary of State regarding any changes to the structure of the partnership.
Many partnerships carry on business in the names of the individual partners. If a general partnership in California takes a different or “fictitious” name – often known as a DBA (i.e., "doing business as") – it must register that name with the county in which the principal place of business is located. Partners should check with the county for specific requirements.
Unless the partnership agreement provides otherwise, each partner has an equal responsibility to manage the business. Partners are entitled to take a share of the profits equal to their individual financial contribution to the business. Section 16401 of the California Corporations Code also states that each partner shares liability for the debts of the business in proportion to his share of the profits.
Dissolving the Partnership
Partners may dissolve their partnership and wind up the partnership's business at any time by mutual agreement. In addition, Section 16801 of the Corporations Code provides that if the partnership has been set up for a particular term, it shall dissolve after the expiration of that term. According to Section 16807, when a partnership is dissolved, its assets must be used to pay off any business debts. Once all debts have been satisfied, the partners can share the remainder in proportion to their rights to profits.
A general partnership is not a taxable entity; instead, each partner is liable to pay tax on his share of the partnership income. The IRS requires partnerships to file information returns on an annual basis setting out income, profits and losses. The California state tax authorities do not levy income tax on general partnerships; however, every partnership that engages in business or earns income from California, should file a California Form 565, Partnership Return of Income. General partnerships may be subject to other rules and regulations depending on the nature of their business.