By: Melanie De Marco
March 31, 2026
In our previous article, we introduced the series on entity formation and selection. One of the most common business entities is the Partnership. Partnerships in California are governed by the California Corporations Code under the Revised Uniform Partnership Act (RUPA) for General Partnerships and the Revised Uniform Limited Partnership Act (Re-RULPA) for Limited Partnerships.
A partnership is just an association of two or more persons who carry on as co-owners of a business for profit. Partnerships can be formal, involving registration with the state and a written agreement, or informal, without any written agreement. However, it is usually strongly recommended to avoid informal structures to prevent potential disputes or confusion in the future.
Benefits of Partnerships
Partnerships offer several advantages to business owners. One of the most notable benefits is the flexibility in management. In a general partnership, all general partners act as agents of one another and can bind the partnership in the ordinary course of business. This seamless management structure, combined with the lack of rigid formalities required by other entity types, makes general partnerships attractive to many business owners. Additionally, partnerships allow for flexible compensation and profit-sharing models, unlike the rigid distribution models imposed by corporate structures.
Another significant advantage is the favorable tax treatment. Partnership income is typically passed through directly to the partners and reported on their individual tax returns, avoiding the double taxation that corporations can face. This pass-through taxation can result in substantial tax savings for the partners.
Drawbacks of General Partnerships
Despite their benefits, general partnerships come with notable risks. One major drawback is the lack of liability protection. General partnerships do not provide a corporate "shield," meaning that each partner is jointly and severally liable for the obligations of the partnership. This means that all partners are equally and fully liable for any debts or liabilities incurred in the ordinary course of business, regardless of which partner originated them.
Limited Partnerships as an Alternative
To address the liability concerns of general partnerships, the limited partnership structure was created. In a limited partnership, there are two classes of partners: general partners and limited partners. General partners retain full management authority and assume personal liability, similar to a traditional general partnership. Limited partners, however, take on a more passive role, serving primarily as investors who share in the profits. In exchange for their limited involvement, limited partners enjoy protection from the business liabilities. This structure is particularly well-suited for investment-focused ventures where passive capital contributions are essential, and active management is handled by a smaller group.
Fiduciary Duties and the Importance of Written Agreements
A critical component of any partnership is the fiduciary duty owed by general partners. General partners are prohibited from engaging in self-dealing and owe the highest fiduciary duty to other general and limited partners. While some aspects of fiduciary duties can be addressed in the partnership agreement, California law limits the ability to contract around these duties to preserve the fiduciary responsibilities of the partners.
It is also important to note the concept of an ostensible partnership. This occurs when a business or investment is treated as a partnership, even if the parties did not intend to create one. Ostensible partnerships are determined based on the appearance of a partnership to outsiders, such as the IRS, and can pose risks to the participants. Clear written agreements can help avoid such situations and ensure that the business arrangement aligns with the parties intentions.
The Key to a Successful Partnership
Partnerships can be a highly effective business model when structured correctly. The key to success lies in selecting the right partners and creating a comprehensive partnership agreement. A well-drafted agreement should govern the management of the partnership, set clear expectations for the business and its owners, and address potential issues before they arise.
If you are considering a partnership business model, it is essential to consult with an experienced attorney who can guide you through the process and help you create a tailored partnership agreement that meets your specific needs. This blog is not intended as legal advice for your specific situation. Selecting the right structure is the first step toward building a successful business
