Limited Partnerships are entities consisting of at least one general partner and at least one limited partner. The general partners manage the business’ day to day operations and are liable for the debts and obligations of the partnership. The limited partners, often called silent partners, do not participate in the partnership’s management. A limited partner’s risk is limited to their investment in the partnership and their identity may remain anonymous making the Limited Partnership ideal for attracting passive investment. It is important that the limited partners take care not to participate in the management of the partnership in any way. Otherwise, they risk losing their limited partner status.
While Corporations and Limited Liability Companies (LLCs) also offer liability protection, Limited Partnerships retain the maximum flexibility of General Partnerships and are relatively simpler to govern. Partners in the Limited Partnership may be individuals, Corporations, LLCs, trusts or other partnerships. Because of the general partner’s exposure to unlimited personal liability, Limited Partnerships are often set up so that the general partners are Corporations or LLCs.
Creating a Limited Partnership
There are no formal filing or registration requirements needed to create a partnership, however, partnerships must comply with registration, filing, and tax requirements applicable to any business. There are also some steps every partnership should take to make sure they follow sound business practices when starting a new venture:
The following are some steps to take when forming a general partnership in California: Choose a business name.
1- Choose a partnership name.
2- Prepare and sign a Partnership Agreement.
3- Obtain the requisite licenses, permits, and zoning clearances applicable to your particular venture.
4- Obtain an Employer Identification Number from the Internal Revenue Service.
Choose a Partnership Name
In California, a partnership may use the surnames of the individual partners or may use a fictitious business name. If a fictitious business name is to be used, a fictitious business name statement must be filed with the County Clerk. To make sure your desired business name is available, run a search in the California Secretary of State Business Search portal, which is available at the following link:
A partnership agreement is not a mandatory legal requirement for establishing a partnership. However, it is a very important step to ensure there are no misunderstandings between the partners and to outline how the partnership will be governed. A well-drafted partnership agreement will help you decide in advance how to handle certain situations. The following is a list of just some things that should be in a partnership agreement:
- Partner contributions
- Allocation of how profits, losses, and draws will be handled
- Management authority for the partnership
- Voting rules
- Admitting new partners
- Voting and decision-making
- Sale of partnership interests
- How to handle death or disability of a partner
- How to resolve disputes.
Even well intentioned, honest partners can find themselves in a legal battle if they do not have a written partnership agreement memorializing their initial purposes. A partnership agreement can always be amended at a later date if circumstances or conditions change. For help creating your partnership agreement, contact an experienced business attorney.
Obtain Requisite Licenses, Permits, and Zoning Clearance
Depending on the type of business a partnership will engage in, it may need to obtain business or professional licenses. Additionally, local regulations, including licenses, building permits, and zoning clearances, may apply to a partnership’s business.
Obtain an Employer Identification Number
If a limited partnership will have employees, it will need to obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This is a nine-digit number issued by the IRS to keep track of businesses. All businesses with employees are required to report wages to the IRS using their EIN. In California, businesses are required to report taxes and file various employee reports. You may need to use your EIN when registering your business to report taxes through the California Board of Equalization.
Limited Partnership Attorney
If you need legal assistance with a partnership dispute or with forming a California limited partnership, Real Estate Law Corporation has highly experienced attorneys that serve business owners and real estate investors in the greater Sacramento area and all over California. To schedule a free consultation with one of our attorneys, simply call us at (916) 767-0000, or use the contact form below.