Creating a California partnership agreement does not involve a complicated process. It does however, involve partners knowing what their goals and objectives are in coming together to build a business and delineating such intents into their agreement. Read on to learn more about how to create a California partnership agreement. Contact A People’s Choice for more information about our partnership agreement drafting services.
Types of California Partnership Agreements
A partnership agreement is not a mandatory legal requirement for establishing a partnership in California. However, it is highly recommended that business owners form an agreement to make sure no misunderstandings arise about their roles. There are two main types of California partnership agreements:
1) General Partnership Agreement
A general partnership agreement is a contract between two or more people who want to form a business partnership. In a general partnership, each partner shares the management of the company and equally remain liable for any company’s debts. The General Partnership Agreement identifies how the partnership is to be run and the role of each partner. The agreement also identifies what kinds of contributions each partner will make. The agreement will also specify whether each partner has an equal or unequal share in the partnership and identify whether a partner or partners will make a larger contribution to the partnership than other partners. The agreement should also specify what happens if a partner dies, becomes incapacitated or wants to withdraw from the partnership and include any details about a buy-out from the remaining partners.
2) Limited Liability Partnership Agreement
In a limited liability partnership agreement, some partners (general) are charged with managing the company and other partners (limited) are obligated to only contribute financially for the growth of the business. The liability and profit-sharing between the partners will vary and should be contractually defined. Unlike in a general partnership, the limited partners are not bound by the obligations of the partnership.
California Corporations Code Sections 15501-15533 covers the Uniform Limited Partnership Act which sets forth statutory requirements pertaining to a limited partnership agreement. In detail, the limited partnership agreement should identify:
- The name, character and principal place of business of the partnership
- The name and place of residence of each member of the partnership and a designation as to whether they are a general or limited partner
- The length of time the partnership is to exist
- The amount of cash or description of and the agreed value of the other property contributed by each limited partner
- The additional contributions, if any, agreed to be made by each limited partner and when these contributions are to be paid
- When the contribution of each limited partner is to be returned
- The share of the profits or the other compensation which each limited partner shall receive by reason of his contribution
- The right, terms and conditions of a limited partner to substitute an assignee as contributor in his place
- The right of the partners to admit additional limited partners
- The right of one or more of the limited partners to priority over other limited partners, as to contributions or as to compensation by way of income, and the nature of such priority
- The right of the remaining general partner or partners to continue the business on the death, retirement, or insanity of a general partner
- The right of a limited partner to demand and receive property other than cash in return for his contribution
- The right of a limited partner to vote upon any of the matters described in California Corporations Code Section 15507 (b), and the vote required for election or removal of general partners, or to cause other action to be effective as to the limited partnership
Preparing A Well Written Partnership Agreement
It is highly recommended for business owners not to enter into partnerships without preparing a well written partnership agreement. A well written partnership agreement should include the term of the partnership, purpose, the initial capital contributions of each partner, how profits and losses will be allocated, how much time each partner is expected to devote to growing the business venture, methods to resolve conflict, and provisions about how the partnership should be dissolved.
Issues included in a well-written partnership agreement are:
- The purpose of the partnership.
- What competitive activities the partners may engage in outside the partnership.
- The initial capital contributions of each partner, whether it be money, property or services.
- Identify any subsequent capital contributions to be made by each partner.
- How and when the profits and losses of the partnership shall be allocated between the partners.
- How the partnership will be managed, what the duties of each partner are and who will make the day-to-day decisions for the partnership.
- Which partner or partners will have signature authority on the partnership bank accounts.
- What actions of the partnership require majority approval or unanimous consent.
- How much time each partner is expected to devote to the partnership business.
- What actions could trigger a partner from being expelled from the partnership.
- Whether new partners can be added to the partnership.
- How a partner can withdraw from the partnership.
- How conflicts will be resolved between the partners.
- What acts will trigger a dissolution of the partnership, the terms of dissolution and steps to formally dissolve the partnership.
California Law When No Written Partnership Agreement
In California, when a partnership is formed without a written agreement between the partners, the rules under California’s Revised Uniform Partnership Act (RUPA) which California statutorily adopted almost verbatim in 1997 (Corp. Code §16100, et seq.) apply. If there is no formal written agreement between the partners, all partners are considered to be equal partners. This means that each partner 1) owns an equal interest in the partnership, 2) has an equal right to operate and manage the partnership, 3) is entitled to an equal share of the partnership profits, and 4) is 100% responsible partnership debts and obligations. Furthermore, without a written agreement, California law provides that disputes are to be settled by a majority vote of the partners and changes to the partnership agreement must be by unanimous vote of the partners. As a result, if there are only two partners, and they disagree, the partners would be forced into litigation to resolve their disagreement. For these reasons, it is important to have a written partnership agreement that clearly defines the terms of your partnership arrangement.
California Partnership Agreement Restrictions
There are several restrictions on the terms of partnership agreements provided under California law. Partnership agreements cannot advocate any of the following:
- The partnership agreement cannot unreasonably restrict the right to access books and records available to partners under California Corporations Code Section 16403.
- The duty of loyalty a partner owes to the partnership cannot be reduced or eliminated.
- The partnership agreement cannot eliminate obligations of good faith and fair dealing.
Prepare A California Partnership Agreement Without An Attorney
Partners do not need to hire an attorney to prepare a California partnership agreement. The partners can hire a legal document preparer to provide them with an agreement. The partnership agreement should detail how business decisions should be made, how disputes are resolved, and how to handle a buyout or complete dissolution. In addition, the agreement should also address the following issues:
- How ownership interest will be shared;
- Which partners will be allowed to cast votes on issues and how deadlocks will be avoided; and
- How assets and debts will be divided in the event a partner withdraws from the partnership or it ceases operations.
Contact A People’s Choice for more information about how we can help you prepare a California partnership agreement.