What to Know About Forming a Partnership in California
- Posted on: Jan 12 2023
When you are looking to start a new business, there are many things to consider. The first thing you’ll need to decide is what type of business entity you wish to form. You can choose to form a formal business entity such as a corporation, limited liability company (LLC), or a partnership. Those who choose a partnership often do so because it’s easier to form and allows for more flexibility in how it operates.
In California, you don’t need a written partnership agreement in order to form a partnership. However, it’s best practice to have one since there are a lot of risks with forming a partnership based on an oral agreement. By drafting a written partnership agreement, you can ensure that there won’t be issues surrounding the intention of each partner.
While many partners rely upon oral agreements for key provisions of their partnership, it’s California’s Revised Uniform Partnership Act (RUPA) that establishes the default rules that govern oral partnerships. While the following isn’t extensive, these are some of the most important provisions to consider in your agreement.
1. Limitations on Outside Ventures
One of the partners may wish to dedicate all of their time to the business while another may split time, also pursuing other business ventures. One important provision to consider is whether these options are permissible. By laying out each partner’s obligations to the business in terms of outside business ventures and time requirements, it helps to avoid related conflict.
2. Ownership Interests, Capital Contributions, and Compensation
Partnerships can be tricky for a few reasons. One of them is what each partner will have in ownership interests, capital contributions, and compensation. Generally, partners who invest more capital into the business will have a larger ownership interest or greater voting rights. Time spent on the business can also be considered an investment in the business, often referred to as “sweat equity.” It’s a good idea for your agreement to clearly state:
- Each partner’s percent ownership;
- Basis for their ownership;
- Whether partners will be required to invest more capital if necessary;
- Whether ownership interest can be vested;
- How each partner is to share in the profits and losses of the business;
- When the partnership will distribute profits or reinvest them;
- What the compensation will be for each partner; and
- Whether any of the partners is entitled to receive a salary.
3. Dissolving the Business
No one starts a business expecting it to fail or dissolve. However, it is extremely important that you and your partner(s) talk about what will happen should you need to dissolve the business for any reason.
4. Transferring Partnership Interest
Another provision to include is whether a partner is permitted to sell their partnership interest. You should have a plan for what will happen if one of the partners becomes disabled, incapacitated, goes bankrupt, or passes away. You should establish how partnership interests will be valued for purposes of transferring them. You’ll also want to consider including provisions for adding new partners.
5. Making Decisions About the Business
Under California default law, the authority to make decisions for the business is split equally among partners. However, this isn’t always desirable. Partners who have invested more and/or have a higher ownership interest often prefer to have greater authority or a vote that carries greater weight when it comes to making decisions for the business. This is important because sometimes majority votes are determined based upon the weight of the vote as opposed to the number of votes. Your agreement should also determine how a deadlock vote is to be resolved. This is usually through mediation or arbitration.
The Law Offices of Brian L. Fox, APLC Help those Who Wish to Establish a Partnership Agreement
There are so many things to consider in a partnership agreement. If you fail to include a provision, the state will fill in the answer for you. Since this is often undesirable, it’s best to consult with a qualified business attorney who can ensure that you haven’t missed anything. At the Law Offices of Brian L. Fox, APLC, we know how important it is to protect your interests and set your business up for success. We will help you to establish a comprehensive partnership agreement that meets your needs. To learn more or to schedule a free consultation, contact us today!
Posted in: Business Planning