How to Form a Limited Partnership in California

Corfu - Greece

A limited partnership in California is a bit more complicated than a general partnership. A California limited partnership is a partnership owned by two distinct tiers of partners: the general partners manage the company and are personally liable for its debts, just as in a general partnership; the limited partners make capital contributions and share in the profits but normally do not participate in the day-to-day operations. It can be distinguished from a general partnership because generally the limited partners do not incur any liability for the partnership debts above and beyond their capital contributions. The limited partners also enjoy liability protection most similar to the shareholders of a corporation. The limited partnership in California is typically used for restaurant businesses, with the founding partners serving as general partners and the investors as the limited partners.

A California limited partnership usually requires filing with the California Secretary of State which establishes the limited partnership. Some states, like California, allow you to create a limited partnership orally or based on a handshake. However, as discussed in previous posts, establishing any partnership, including a limited partnership, in California without a written agreement specifically spelling out all the terms binding the partners is not the best practice. Just as warned previously, oral limited partnership agreements may lead to misunderstandings or disputes.  Further, the liability protection offered to limited partners may fail.

Since Limited Liability Companies or LLCs have gained popularity, the use of limited partnerships in California has declined.  Although the entities are similar in that they both can be taxed in the same way as a general partnership, the LLC probably offers greater liability protection because the protection is extended to all its managers. Accordingly, today LLCs are often selected over limited partnerships.  Because limited partnerships can be quite complex and, therefore, this is an entity you may not want to attempt to form without the help of a qualified attorney.  If you would like to discuss whether a California Limited Partnership is the correct entity for you, please contact us to schedule a time to discuss your entity selection.

Comments

  1. Jonathan Fleming says

    good feedback, sounds like llc is best structure for any partnership? I wonder if LLC structure vs LPis good if you tend to raise funds for real estate?

    Thanks for info….