As a new business owner, one of your most important decisions is determining what form of ownership will best meet your business needs. Selecting the best structure for your business should be a carefully planned process that is discussed with a qualified professional such as an enrolled agent, certified public accountant, or attorney who specializes in this area. In addition, as your business grows over time, you may want to evaluate if a new form of ownership should be used to achieve better results.
Limited partnerships are formed by two or more people, with at least one person acting as the general partner who has management authority and personal liability, and at least one person in the role of limited partner. All partners – both general and limited – must enter into limited partnership by either oral or written agreement. A formal written partnership agreement is advisable.
Limited partnerships are managed and controlled by one or more general partners; general partners have authority to bind the partnership. Limited partners normally do not participate in managing the business.
The general partners are liable for partnership obligations to the same extent as partners of general partnerships. Limited partners, however, are generally not liable for the partnership’s obligations; their only risk is their agreed capital contribution, or as otherwise provided in the partnership agreement. However, if limited partners participate in the management of the partnership business, they may lose their protected limited partner status and become liable to the same extent a general partner is.
Key Features of a Limited Partnership
- Flexible form of business and relatively easy to set up.
- Allows for more than one owner, unlike a sole proprietorship.
- Involves two or more people who agree to create a business and share in its profits and losses.
- The partners decide the structure of the entity, the allocation of profits and losses, and the timing and amount of distributions.
- The general partner is responsible for managing the business affairs.
- The limited partner typically provides only capital, such as cash, to the partnership.
- Each general partner assumes full personal liability for the debts and obligations of the partnership.
- The limited partner’s liability is normally limited to their investment in the partnership.
- It exists, subject to limitations imposed by California law, as long as the partners agree it will and as long as there are at least two partners, one of which is a general partner and one of which is a limited partner.
- Does not pay income tax.
- Pays an annual tax of $800 to California.
How to Form a Limited Partnership
To form limited partnerships, a Certificate of Limited Partnership (Form LP-1) must be filed with the California Secretary of State. A limited partnership formed in another state must register with the California Secretary of State by filing an Application to Register (Form LP-5) and attaching a completed form of valid certificate of good standing prior to conducting business in the state. The Secretary of State will assign a 12-digit filing number. Keep this filing number for your tax records. Contact the California Secretary of State at 916.657.5448 or go to sos.ca.gov for more information.
- A separate bank account should be established for the limited partnership.
- A formal written limited partnership agreement is advisable.
- The limited partnership should consider purchasing insurance to cover the risks of running the business. Consultation with a business attorney and an insurance specialist on the matter is advisable.
- Most cities and counties require a business license, various permits, and/or registration to do business within their city or county limits. If you are doing business in multiple cities or counties, you may be required to have multiple licenses. Contact the business licensing department of the city and/or county directly where your business will primarily be located for specific rules and regulations. The Governor’s CalGold online database at calgold.ca.gov, the Governor’s Office of Business and Economic Development (