Thinking about starting a business with a partner? Partnerships can be a great way to combine strengths, share responsibilities, and build something bigger together, but they also come with unique risks and legal considerations.
With over 4.5 million partnership tax returns filed in 2022 alone, it’s clear this business structure is popular, but its operation is far from simple. Before you dive into a new partnership, it’s important to understand what you’re agreeing to. In this article, our California business attorneys walk you through key things to consider before entering a partnership.
Overview of California Partnerships
California law defines a partnership as having two or more individuals wanting to operate a business as co-owners. The two most common forms of partnerships in California are general partnerships and limited partnerships.
A general partnership has two or more general partners who share equal responsibilities and rights to manage the business. A limited partnership must have at least one general partner who owns and manages the business. The partnership can have one or more limited partners who work for the company but do not have management rights or responsibilities.
Partnership Agreements Are a Must
The partners should have a partnership agreement. The agreement is a contract between the partners outlining how the business will operate, the rights and responsibilities of the partners, and other relevant information. California does not require partners to file a partnership agreement. However, the agreement is essential to protect the partners.
Issues and matters included in a partnership agreement include, but are not limited to:
- The capital contribution for each partner
- The duties of the general partners
- The rights and responsibilities of limited partners
- How profits and losses are shared between the partners
- The process used when a partner wishes to exit the partnership or passes away
- The process for resolving disputes
- Which partners have decision-making authority that binds the entire partnership
Because a partnership agreement is legally binding and can result in personal liability for business debts, it is wise to seek legal counsel before entering a partnership in California. Understanding your rights, responsibilities, and obligations is crucial when entering a business arrangement with other individuals.
Legal Considerations and Risks to Consider Before Entering Into a Partnership
The partners may not have equal ownership or rights within the partnership. The partnership agreement defines these rights. Therefore, that is the first legal consideration when entering a partnership. The second consideration is whether you are a general or limited partner.
General vs. Limited Partners
The benefit of being a general partner is controlling and managing the company. General partners can make irreversible and binding decisions for the company. The partners can define each partner’s roles within the company in the partnership agreement. However, the risk of being a partner is that you are liable for all business debts. Therefore, being a general partner comes with significant personal liability.
Limited partners do not manage the business. They cannot make decisions that bind the entire business. On the other hand, limited partners are only liable for debts up to the amount they contributed to the company.
Tax Implications of a Partnership
Another consideration for partners is the tax implications of a partnership. Partnerships are pass-through entities for tax purposes. The profits and losses flow through the partnership to the individual partners, who pay personal income taxes on the profits. Consulting with tax professionals before entering a partnership is strongly recommended.
Regulatory Compliance for Certain Professions
Another essential consideration is regulatory compliance. Many partnerships are developed for professionals such as doctors, lawyers, and accountants to operate a business together. Some partnerships may be subject to professional standards, licenses, permits, and registrations. Partners must understand regulatory requirements for ongoing compliance to avoid legal liabilities and penalties.
These are just a few of the key considerations individuals should carefully evaluate before entering into a partnership. An experienced partnership attorney can help protect your best interests as you embark on a new business venture with partners.
Schedule a Consultation With Our California Business Attorneys
If you are considering a partnership, schedule a consultation with our attorneys at Schneiders & Associates, LLP. Our California business attorneys have extensive experience assisting clients with developing business plans and creating business entities.
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