How to Form a Limited Partnership in California
The attorneys of Theta Law Firm are familiar with the formation, maintenance, and dissolution of various business entities in California. For advice on how to form your business or other legal questions relating to your business, please feel free to give us a call or send us an email.
The limited partnership is a form of a partnership where there are general partners and limited partners. The general partner is has management control, shares profits/losses of the partnership, has joint and several liability for the partnership's debts, and has the right to use partnership property. The limited partners have little or no control over the partnership's operation, but share a portion of the partnership's income/losses, so they are similar to shareholders in a corporation. Limited partners also enjoy some liability protection.
The following is a brief overview of the steps that need to be taken to form a Limited Partnership (LP) in California.
Before forming a limited partnership in California, you should consider whether forming a limited partnership is the best fit for your business. More on that can be found here: www.thetafirm.com/articles.
Note that limited partnerships are different from limited liability partnerships.
Step 1: Register with the California Secretary of State (required)
The first step in forming a limited partnership is filing the Certificate of Limited Partnership (LP) (California Form LP-1) with the California Secretary of State. The form is available on the California Secretary of State's website here: http://www.sos.ca.gov/business/be/forms.htm. This form can be submitted online, mailed, or hand-delivered to the California Secretary of State's office. You must also pay a $70 filing fee.
The Certificate of Limited Partnership must include: (1) the limited partnership's name, (2) its place of formation, (3) its principal office and mailing address (if different), (4) the names and addresses of each general partner, (5) and the name and address of the limited partnership's registered agent for service of process.
Name selection: The limited partnership's name must end with: "Limited Partnership," "LP," or "L.P.," and may not contain "bank," "insurance," "trust," "trustee," "incorporated," "inc.," "corporation," or "corp." The name you choose for your limited partnership must be available. You can check the California Secretary of State's website for business entity names that are taken by going here: http://kepler.sos.ca.gov/. Other restrictions may apply. Contact an attorney for more information about the requirements in your specific county.
Foreign limited partnerships: Out of state limited partnerships must register with the California Secretary of State to do business in California. Limited partnerships can register by filing a Foreign Limited Partnership Application for Registration form (LP-5), which can be found here: http://www.sos.ca.gov/business/be/forms.htm. Foreign limited partnerships will have to pay the annual minimum tax of $800 in California just like limited partnerships formed in California.
Step 2: Draft and Execute a Partnership Agreement
While written partnership agreements are not mandatory in California, it is highly advisable to have one drafted and executed by all of the partners. If you don't, everything defaults to California law. Partnership agreements are the number one way to avoid potential disputes (and consequently lawsuits). Among other things, your partnership agreement can cover what each partner's tasks and responsibilities will be, how the partnership will be formed, how profits will be shared (and liabilities), who has access to what documents/property, and how the partnership will be terminated (yes, always plan for it even if you think you and your partner will never disagree). For this step, seek an attorney's advice!
Limited partnerships more than any other kind of partnership should have written agreements because they are not as simple as general partnerships (where there are, for example, just two partners and everything is split 50/50. The written agreement should discuss the method for admitting/removing new partners (limited and general), how the partnerships operations will be financed, who is responsible for the partnerships liabilities, how profits are shared, how the partnership will be resolved, etc.
Step 3: Obtain Local Business License and Comply with Local Laws (required)
Different localities have unique rules that apply to businesses within their jurisdiction. Cities in Southern California often require you to obtain a business license to do business in their city. This could be as simple as submitting a form to the city, or it could be much more complicated and require the approval of various local governmental entities.
For example, businesses operating in the City of Los Angeles are required to obtain a business license from the city. Forms necessary for doing business in the City of Los Angeles can be found at: http://finance.lacity.org.
In addition to obtaining the necessary business permit/license, the locality may also require you to pay certain fees and follow other rules.
Each locality is different, so it is best to consult with experience counsel on the subject before opening your doors. The attorneys of Theta Law Firm can help guide you through the web of laws at a low cost.
Additional information can be found at the CalGold Business Permits website: http://www.calgold.ca.gov/.
Step 4: Obtain an Employer Identification Number (EIN) (required)
Don't forget to obtain your Employer Identification Number (EIN): If you plan to form a partnership, you should obtain an Employer Identification Number (EIN) from the IRS. Information about the EIN form and the form itself can be found at: http://www.irs.gov/businesses/small/article/0,,id=98350,00.html.
Step 5: Pay California Limited Partnership Taxes/Fees (required)
A common misperception about limited partnerships is that they don't have to pay anything annually for taxes; this is not entirely correct. Limited partnerships that are organized in California or conduct business in California must pay the annual minimum tax. (See California Revenue and Taxation Code sections 17935 and 23153.)
What taxes does a pass-through limited partnership have to pay?
1) Annual minimum tax: as of the writing of this article, the annual minimum tax in California is $800.
2) Income-based tax: a limited partnership must pay additional taxes if its income is over a certain level. As of the writing of this article, limited partnerships with income above $250,000 must pay additional taxes to the California Franchise Tax Board (the amount of additional taxes increases as the limited partnerships income increases).
However, "[a] limited partnership shall not be subject to the taxes imposed by this chapter if the limited partnership did no business in this state during the taxable year and the taxable year was 15 days or less." (California Revenue and Taxation Code section 17936.)
California's limited partnership tax form: limited partnership must file a Partnership Return of Income of Income form (California Form 565), which can be found here: https://www.ftb.ca.gov/forms. The form must be filed by the 15th day of the 4th month after the close of the partnership's taxable year.
Pay the California payroll tax: Businesses in California are subject to California's payroll tax if they pay more than $100 of wages in any quarter of a calendar year. This will open your business up to numerous additional regulations/laws/requirements. For more information, see the California Employment Development Department (EDD) here: http://www.edd.ca.gov/.
You must also be sure to satisfy federal laws and tax obligations as well.
You can reach an attorney at Theta Law Firm by calling us or sending us an email at law@thetafirm.com. Theta Law Firm can represent clients all across the State of California, including in any of the following counties: Alameda | Alpine | Amador | Butte | Calaveras | Colusa | Contra Costa | Del Norte | El Dorado | Fresno | Glenn | Humboldt | Imperial | Inyo | Kern | Kings | Lake | Lassen | Los Angeles | Madera | Marin | Mariposa | Mendocino | Merced | Modoc | Mono | Monterey | Napa | Nevada | Orange | Placer | Plumas | Riverside | Sacramento | San Benito | San Bernardino | San Diego | San Francisco | San Joaquin | San Luis Obispo | San Mateo | Santa Barbara | Santa Clara | Santa Cruz | Shasta | Sierra | Siskiyou | Solano | Sonoma | Stanislaus | Sutter | Tehama | Trinity | Tulare | Tuolumne | Ventura | Yolo | Yuba