Partnering up in Business: Yay or nay?

Recently, I had a client, let’s call him Larry, come to me with a dilemma. He has started a business in Long Beach, CA. He wanted to include a close friend, Joe, in his growing business (a sole proprietorship at the time) but did not want to pay the $800 California Franchise Tax board annual tax. I advised him to form a Limited Liability Company and elect to be taxed as an S-Corporation, but it would not solve his $800 annual tax dilemma.

A few months later, Larry came back and said that a google search revealed that a partnership might be a good option for him because a general partnership does not need to be registered with the State and thus, does not have to pay the annual tax. While this is correct, in a general partnership in California, all partners share all debts and liabilities and Joe was just helping out once in a while and did not want to be held to that liability standard.

A few days later still, Larry called and asked about a limited partnership and whether that would exempt him from the annual tax and protect Joe from liabilities of the business. I advised Larry that in a limited partnership, Larry can be the general partner and be the one that is liable for the debts of the business, and Joe can be a limited partner, so it would accomplish the liability protection part of their concern, but limited partnerships need to be registered with the California Secretary of State and would need to pay the $800 annual tax to the CA Franchise Tax Board, so it would not accomplish the other part of the equation.

California has a comprehensive and clear structure for business entities, especially for purposes of liability protection. Most entities in California are not exempt from the $800 annual tax, so that is an important point for business owners to know when starting a business in California, especially when there is more than one person involved.

When you are interested in forming a partnership of some sort, seek the advice of an attorney but more importantly, go in with an open mind understanding that some compromises will need to be made from the very beginning.

If you have specific questions about partnerships, call us at 949-346-5294 or make an appointment at madaanlaw.com/appointment.


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