A General Partnership is the standard partnership most people are familiar with. It is much like a sole proprietorship in that the partners (each of them) remain liable for the debts and obligations of the partnership. It is distinguishable from the Limited Partnership in that in limited partnerships one or more general partners control the day to day operations of the partnership. In exchange for giving up control of the partnership, the limited partners are able to limit their liability for the debts and obligations of the partnership (similar to the way members in a Limited Liability Company limit their liability). Most partnerships are General Partnerships. The reasons for choosing a Limited Partnership are varied and complicated and best discussed with an experienced partnership lawyer in San Diego.
With general partnerships, all partners control the company and are personally liable for the company's debts including damages awarded in lawsuits. In fact, each partner is personally liable for the full amount of any partnership debt and not just their share of the debt based on their ownership interest (called joint and several liability). However, the partner is free to file a lawsuit against the other partners for indemnification. This is a particularly important issue for partners with unequal wealth. Partners with significant assets may be left holding the bag if the partnership fails to meet its obligations and the remaining partners are insolvent. This problem is highlighted by the fact that each partner retains "agency authority" and is able to bind the partnership by contract. To reduce this risk, the partners may file an optional Statement of Partnership Authority with the California Secretary of State which limits the authority of some or all of the partners to contract on behalf of the business.
General Partnerships are less formal than corporations and limited liability companies. They are governed by the agreement of the partners usually pursuant to a written partnership agreement prepared by a San Diego partnership lawyer. While it is common for partners to enter into partnerships pursuant to oral agreements, it is not advisable. See "Why Oral Partnerships Are a Bad Idea". Partnership agreements allow for maximum flexibility in governance of the company including maintaining the ability to allocate profits and losses to the partners as they see fit (except that tax implications should always be considered where special allocations exist). There are no formal requirements under the California law. The partners do not need to file paperwork with the California Secretary of State as is required when forming a corporation or limited liability company. However, the company is still required to comply with regulations governing businesses in general. Partnerships are not free to ignore licensing requirements, labor laws, sales taxes, OSHA work safety regulations and other state and federal laws.
The partners in a general partnership are taxed individually based on their distributive share of the business' profits and losses which is reported on the Federal income tax return. With flow through taxation, the partners do not need to worry about the double taxation associated with corporations. However, partnerships are required to file Form 1065 Return on Partnership Income except that Federal law exempts small partnerships (10 domestic, individual partners or less) from the need to file partnership tax returns. California does not have an equivalent exemption which means that all partnerships in California are required to file "partnership tax returns".
Choosing the right business entity for a new partnership is one of the most important decisions young business partners must make. To give a partnership the best chance of success, it's best to discuss all potential options with a partnership lawyer in San Diego. There are significant benefits to forming a corporation, limited liability company or other formal business entity despite the accompanying formalities that must be followed. While it may be that the less formal partnership is right for your business, it's advisable to at least consider the other options.
If you have questions about forming a partnership or another formal business entity, please contact San Diego Partnership Attorney Donald R. Oder at (888) 900-9002.