How to Change From a General Partnership to a Sole Proprietorship in CA

By Jeff Franco J.D./M.A./M.B.A.

If you are a partner in a general partnership based in California and you want to change the business structure of the company to a sole proprietorship, you can make this conversion with minimal paperwork. Before you proceed, however, it is important to understand the difference between dissociating from the partnership and dissolving the partnership entirely.

California General Partnerships

California allows two or more individuals or entities that conduct business to hold themselves out to the public as a general partnership. Unlike a limited liability company or a corporation, formation of the general partnership occurs at the time all prospective partners agree to run a business together – not at the time of filing formation documents with the California Secretary of State. Although a formal filing is not required, the state does allow general partnerships to register by filing a Statement of Partnership Authority on Form GP-1. Regardless of whether a GP-1 is filed, all partners are jointly liable for a portion of the partnership’s debts, even those that remain outstanding after converting from a general partnership to a sole proprietorship.

Dissolving General Partnership

If your intention is to dissolve the partnership but continue working as a sole proprietor, California doesn’t require that you file any documents to effectuate the dissolution. However, if your partnership filed a GP-1, you must file a Statement of Dissolution on Form GP-4 to officially dissolve or terminate the partnership. The form is short and requires minimal information to complete – the business name, the Secretary of State file number issued to the general partnership after filing the GP-1, the signatures of two partners, a return address and optional attachments if you choose to disclose other matters relating to the partnership. Keep in mind that you and the other partners have an obligation to wind up the partnership’s affairs, which includes paying outstanding business debts with remaining partnership assets.

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Partner Dissociates

Alternately, you can dissociate yourself from the general partnership if you no longer wish to be a partner. For example, you may want to start your own business as a sole proprietor. When you dissociate, the partnership continues to exist provided at least two partners remain, so it’s not necessary for you to wind up the partnership’s affairs. You or the remaining partners have the option of filing Form GP-3, Statement of Dissociation, to remove your name from the partnership on official state records. Proof of this filing may be beneficial in the event that the Internal Revenue Service or state taxing agencies claim you owe tax on income the partnership earns after your dissociation.

Starting Sole Proprietorship

For most businesses that operate in California as sole proprietorships, the filing of state formation documents isn’t necessary. However, if you operate the business using any name other than your own, you must file a Fictitious Business Name Statement in the county of your principal place of business. In fact, it isn’t even necessary to dissolve or dissociate from the general partnership prior to commencing work as a sole proprietor. You can simply start a new business and operate it as a sole proprietor while continuing to hold your position as a partner in the general partnership.

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References

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IRS Instructions for a Business Name Change

If you change the legal name of your business, then as the owner, partner or corporate officer, you are authorized to file the name change with the Internal Revenue Service. How you complete this filing, and which form of notice you use, depends on what type of business you're running.

Delaware Limited Partnership Law

Limited partnerships, or LPs, are governed by the Limited Partnership Act in Delaware. This act authorizes the formation of a partnership with at least one general partner and additional limited partners. While the general partners remain personally liable for the debts of the business, limited partners are liable only up to the amount of their financial investment. To form, operate or dissolve an LP in Delaware, you must observe all state guidelines and filing requirements.

How to Disband a Partnership

A partnership is the default form for businesses that are formed by two or more persons for profit. A partnership may be created by an oral or written agreement. Although a partnership may be straightforward to create, and may even be created inadvertently, disbanding a partnership may take some planning. A partner can always dissolve a partnership unilaterally, but doing so may have financial consequences. Once a partner expresses the intent to dissolve a partnership, the other partners may have to wind up the finances or, in some states, buy out the dissociating partner.

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