General Partnerships PDF Print E-mail

A general partnership is an association of two or more persons to carry on a business for profit as co-owners [Corp. Code § 16101(9)]. The term ''person'' includes individuals, partnerships, corporations, limited liability partnerships, limited liability companies, and other associations [Corp. Code § 16101(13)]. General partnerships may engage in every trade, occupation, or profession [see Corp. Code § 16101(1), (9)]. However, to engage in the banking business, a general partnership must be duly organized for that purpose [Fin. Code § 102].

If a dispute arises as to whether a particular group is actually a partnership, the determining factor is usually the existence of a partnership agreement, whether oral or written. However, the intentions of the parties to conduct the business as co-owners, with mutual right of control and with the right of each owner to share in the profits of the business, may also be shown by the surrounding circumstances [ Greene v. Brooks (1965) 235 Cal. App. 2d 161, 165-166, 45 Cal. Rptr. 99 ]. For example, sharing business profits is presumptive evidence that the receiver is a partner in the business, unless profits are received in payment of a debt or as wages, rent, an annuity, a loan, or consideration for the sale of goodwill or other business property [Corp. Code § 16202(c)(2), (3)], or unless one of the exceptions of joint ownership exists [Corp. Code § 16202(c)(1)].

Although not as simple a form of business organization as the sole proprietorship, a general partnership is easier to organize than a limited partnership or a corporation and can provide a relatively simple arrangement regarding management and control, capital contributions, and the sharing of profits and losses.

Management and Control

Each general partner is an agent for the partnership for the purpose of conducting its business. All partners are bound by any partner who acts within the scope of partnership business, unless the partner actually lacks the authority to act and the other party has knowledge of this fact [Corp. Code § 16301(1)].

Extent of Personal Liability

Partners in a general partnership like sole proprietors (and unlike limited partners in a limited partnership and corporate shareholders) are personally liable, jointly and severally, for partnership debts, obligations, and liabilities [Corp. Code § 16306(a); see Corp. Code § 16305; see also Great Western Bank v. Kong (2001) 90 Cal. App. 4th 28, 31-33, 108 Cal. Rptr. 2d 266 (although under Corp. Code § 16306(a) all partners were jointly and severally liable for bank loan on real property, after foreclosure and entry of deficiency judgment, assignment of judgment to partnership and 11 of 12 partners extinguished the debt; the 11 partners could not acquire bank's right to collect balance of judgment from 12th partner, their co-obligor)]. A general partner's liability is not limited to that partner's percentage interest in the partnership, but extends to his or her other assets as well [Corp. Code §§ 16305(a), 16306]. However, some limited liability might be achieved if a partner is an entity, other than a natural person, with its own limited liability.

A judgment against a partnership is not by itself a judgment against a partner. A judgment against a partnership may not be satisfied from a partner's assets unless there is also a judgment against the partner [Corp. Code § 16307(c)]. However, a timely IRS assessment against a partnership for a tax debt for which the general partners were secondarily liable has been held sufficient to extend the statute of limitations for collection of the tax from the general partners. It was not necessary for the IRS to separately assess the general partners during the limitations period in order to extend the statute of limitations for collecting the tax from the general partners in a judicial proceeding [ United States v. Galletti (2004) 541 U.S. 114, 124 S. Ct. 1548, 158 L. Ed. 2d 279, 284-285 ; see I.R.C. § 6502].

Availability of Capital

A partnership's ability to borrow, like that of a sole proprietorship, usually depends on the individual partners' creditworthiness and on the availability of business assets to serve as collateral. Partnership capital interests are generally not considered securities subject to regulation by federal and state securities law [see 15 U.S.C. §§ 77a-77aa (federal Securities Act of 1933); Corp. Code §§ 25000-25706 (California Corporate Securities Law of 1968)].

Continuity of Existence

Continuity of existence is more tenuous in a general partnership than in a corporation. Although the Uniform Partnership Act of 1994 [Corp. Code § 16100 et seq.] generally made it easier for general partnerships to continue after the ''dissociation'' [see Corp. Code § 16601 (defining ''dissociation'')] (by death or otherwise) of a general partner, there are still circumstances under which a general partnership will dissolve unless the remaining partners take affirmative steps to continue it. In the case of a partnership at will, the partnership is disolved by the express will of at least half of the partners (other than wrongfully dissociating partners) to dissolve and wind up the partnership business [Corp. Code § 16801(1)]. In the case of a partnership for a definite term or particular undertaking, a partnership is dissolved when any of the following occur [Corp. Code § 16801(2)]:

  • Ninety days after a partner's dissociation by death or otherwise, unless before that time a majority in interest of the partners (including partners who have rightfully dissociated) agree to continue the partnership.
  • The express will of the partners to wind up the partnership business.
  • The expiration of the term or the completion of the undertaking.
  • An event agreed to in the partnership agreement resulting in the winding up of the partnership business.
  • An event that makes it unlawful for all or substantially all of the partnership business to be continued.
  • A judicial determination that either (1) the economic purpose of the partnership is likely to be frustrated; (2) another partner has engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business in partnership with that partner; or (3) it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement.
  • On application by a transferee of a partnership interest, a judicial determination that it is equitable to wind up the partnership business after the expiration of the term or completion of the undertaking, if the partnership was for a definite term of particular undertaking at the time of the transfer or entry of the charging order that gave rise to the transfer.

Taxation

A general partnership is a separate tax-reporting entity for income tax purposes and must file an informational return that details income and deductions [I.R.C. § 6031(a)]. A general partnership is not a separate taxable entity [I.R.C. § 701]. Further, general partnerships (unlike limited partnerships, limited liability companies, and limited liability partnerships) need not pay a tax for the privilege of doing business in California [Rev. & Tax. Code § 17851.5; see Rev. & Tax. Code § 23153; see also Rev. & Tax. Code §§ 17935, 17941, 17948]. This tax is not deductible by any entity [Rev. & Tax. Code § 17220(c)].

Partnership income and losses flow through to the individual partners proportionately, as agreed, provided there is ''substantial economic effect'' to the agreement and subject to the amount of the adjusted basis of the partner's interest in the partnership [I.R.C. § 704(a), (b)(2)]. These items of income and loss are reflected on each partner's individual income tax return [see I.R.C. §§ 701-761].

State law that classifies an entity as a partnership is not controlling for income tax purposes [Treas. Reg. § 301.7701-1(a)(1)]. Classification of an entity as a partnership rather than a corporation for federal tax purposes formerly required a determination that the entity had fewer corporate than noncorporate characteristics, and required a potentially complicated analysis of whether or not the entity possessed one or more of four corporate characteristics on which the regulations based this determination. However, regulations effective January 1, 1997 [Treas. Reg. §§ 301.7701-1-301.7701-3] abolished this approach and instead permit most unincorporated entities to elect to be taxed as a corporation or as a partnership. Entities with only a single owner may elect to be classified as a single owner or to be disregarded as an entity separate from their owners Treas. Reg. § 301.7701-3(a)].

 

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