OVERVIEW OF GENERAL PARTNERSHIPS
ATTRIBUTES OF A GENERAL PARTNERSHIP
Under California law, “…the association of two or more persons to carry on as coowners a business for profit forms a partnership, whether or not the persons intend to form a partnership.” Therefore, partnerships may be formed without the partners even knowing or intending it to happen. A partnership is also “an entity distinct from the partners.” A general partnership and its partners have the following attributes:
FORMING A GENERAL PARTNERSHIP
Forming a general partnership is easy because filing with the state is not required, in contrast to limited partnerships, corporations, LLCs, and LLPs (limited liability partnerships), which all require filings. General partnerships are also not required to pay the minimum annual franchise tax to the Board of Equalization of the State of California. The only fees required if you decide to form a general partnership are associated with (1) filing a fictitious business name statement if it conducts business under a fictitious name, and (2) obtaining a license or permit for a specific type of business activity. A trademark search and registration, either at the state or federal level, is always advisable for general partnerships, especially if a band name is involved.
THE IMPORTANCE OF A GENERAL PARTNERSHIP OR BAND PARTNERSHIP AGREEMENT
A written partnership agreement is important because it removes uncertainties regarding partners’ legal relationships, and gives the partners a guide to how their business relationship should progress over time. A written partnership business agreement or a band partnership agreement is not required by California law; a partnership agreement may be express, implied, oral, or written (see Cal. Corp. Code 16101.10). However, partners, whether in a business or a band, should enter into a written partnership agreement spelling out clearly the terms and conditions of their business association, because California’s Uniform Partnership Act of 1994 (also known as “RUPA”) only provides a basic framework for operating a general partnership.
Here is an example of how RUPA’s default rules could harm your company or band if not altered via a written partnership business agreement or a band partnership agreement. Let’s say there are two partners who run a trendy home furnishings boutique. One partner is known as the “brains” behind the operation for keeping the books, managing employees, and scouting locations for branch stores, while the other partner is the “face” of the store, handling in-store customer service and ordering new and exciting products. However, these roles have never been explicitly designated by any kind of agreement between the partners. One day, the “brains” partner orders a pallet of gaudy, rainbow-colored exercise balls thinking they will be a big seller, much to the chagrin of the “face” partner; a big dispute between the partners ensues.
Under RUPA’s default rules (specifically Cal. Corp. Code §16401(f)), each partner has an equal right to manage and operate the business and therefore, because the partners did not have a written partnership agreement, the “brains” partner had every right to order the exercise balls. Furthermore, another RUPA default rule (Cal. Corp. Code §16401(j)) mandates that disputes arising over partnership business must be decided by a majority vote of the partners and if there is a tie, the outcome may have to be decided in court.
Now, the “face” partner must decide to either accept the exercise balls or take his partner to court and litigate the dispute, with a judge possibly casting the deciding vote. A written partnership agreement could have helped avoid this outcome by (1) clearly stating each partner’s roles, duties, and responsibilities in managing the business and (2) providing a mechanism for dispute resolution that makes litigation only a last resort, or not an option at all.
The firm will craft customized provisions in your general partnership or band partnership agreement that not only avoid the effects of RUPA’s default rules if so desired, but also reflect the business temperament of you and your partners. Ultimately, a well-written partnership agreement or band agreement defines and guides your business and the relationship between its partners.
