There are several significant differences between the general partnership and the limited partnership (LP), starting with the roles of the partners themselves. With a general partnership, the partners split profits evenly and take equal responsibility when it comes to liability ― general partners are personally liable for the company’s debts and settlements.
With a limited partnership (not to be confused with the LLC), there is at least one general partner and one limited partner, which is the term for a partner that does not have managerial responsibilities, and their liability is limited to the amount of money they invested in the partnership.
Sometimes, you’ll hear limited partners referred to as “silent partners” due to their lack of direct involvement in the day-to-day operations of the company.
Another major difference is that the general partnership is not a formal business structure, which means you don’t even need to file formation documents with the state of California, or pay any sort of formation fee. The general partnership is simply formed when the partners begin transacting business together.
On the other hand, a limited partnership does have a formal formation process with the California state government, and there is also a formation fee involved.
Whereas the state of California allows general partnerships to operate under the individual names of the partners, that is not the case for limited partnerships, which must have a distinct business name.
Your limited partnership’s name is often the first impression you get to make on potential customers, and therefore it goes without saying that this is an important step. There are a few different aspects to take into consideration when selecting a name for your business:
All limited partnerships in the State of California must end their business name with “limited partnership,” “LP,” or “L.P.” In addition, you cannot include any words that refer to other business types (like “corporation” or “incorporated”), and you also can’t use words that are typically used to refer to specific kinds of businesses (like “bank” or “law office”).
Another aspect to consider is including language that explains what your business does ― for example, if you’re a realtor, put the phrase “real estate” in your LP name. Additionally, if your business has strong values like being environmentally friendly, you can indicate that by including the word “green.”
At the end of the day, this is your business, and you should choose a name that makes you proud. You should also make sure your limited partnership’s name both sounds good when spoken out loud, and looks good when written down.
The most important consideration for naming an LP is to not get too attached to any one business name until you have either reserved the name with the state of California, or you’ve officially formed your business.
The process for acquiring your business name in the State of California involves multiple steps. First, you should perform an initial business entity search to determine whether your desired name is available. Then, you must send a formal Name Availability Inquiry Letter to the California Secretary of State to ensure that your desired name is, in fact, available.
Once you have received confirmation that your business name is available, you can then reserve that name for 60 days by completing a Name Reservation Request form. You will formally claim your DBA when you officially file your Certificate of Limited Partnership with the California Secretary of State.
Every limited partnership in California is required to designate a registered agent, which is the individual or registered agent service that receives government correspondence on behalf of your business, then forwards those documents to you.
According to the California Secretary of State,
An Agent for Service of Process is responsible for accepting legal documents (e.g. service of process, lawsuits, other types of legal notices, etc.) on behalf of the LP. ”
Without a registered agent in California, you could lose your good standing and the state also has the right to dissolve your LP if they decide to. In a worst-case scenario, the state could fail to alert you regarding a lawsuit against your company, which could even lead to a judgment against your business because you didn’t defend yourself.
At the end of the day, we recommend designating a registered agent service to handle these requirements. Doing so will help eliminate junk mail and more importantly, keep your personal and/or business address off public record.
At this point, it’s time to legally form your new limited partnership.
You will form your LP by filing a Certificate of Limited Partnership with the Secretary of State in California. To complete this form, you will need the following information:
In order to begin preparing your Certificate of Limited Partnership, use this pdf from the California Secretary of State’s office.
Cost to Form an LP: The state of California charges a filing fee of $70 to form a limited partnership.
Processing Time: The Secretary of State will generally process your LP formation in around 10 business days. However, processing times will increase during peak filing season.
While not legally required by the state of California, a limited partnership agreement outlines some of the key operating principles of the business. Even though you don’t have to submit it to the state to form your LP, it’s still a vital document that describes the exact nature of the agreement between the general partners and limited partners.
The information included in a limited partnership agreement does vary depending on the nature of your business, the size of your company, and some other variables. In general, it’s good to get the following information down in writing:
Limited partnerships require a federal tax ID number, or EIN. An EIN is basically the business version of a social security number, and it’s used for a variety of important LP functions.
For instance, you’ll need an EIN if you want to hire any employees, and many banks require them to open business bank accounts as well. You’ll also need one for tax purposes, hence the name federal tax ID number. Get an EIN for your LP for free through the IRS.
All LPs in the State of California are responsible for the Franchise Tax, which is paid on the net income of your business. However, regardless of the net income of your LP, you are required to pay a minimum of $800 to the Franchise Tax Board each year.
The State of California also levies a number of other business-related taxes, which may or may not apply to you depending on the nature of your business. Businesses that sell goods or other products, for instance, will need to register for sales and use tax. Additionally, if your LP has employees, you will need to pay employer withholding tax, too.
Determining your exact tax burden in the State of California can be complicated, but if you use the California Tax Service Center, you can register your business and automatically enroll to pay all applicable state taxes.
Depending on where in California your business is located, you may also need to pay local taxes.
California’s major cities – namely Los Angeles, San Diego, San Jose, and San Francisco – offer their own business resources, so you should ensure that you are also aware of any local tax and regulatory requirements.
In the State of California, you do not need to obtain a general business license.
However, California does require that certain types of businesses obtain industry-specific permits or licenses. All businesses that sell goods, for example, must obtain a seller’s permit, and businesses in industries such as child care and cosmetology have special licensing and permitting requirements.
California has hundreds of industry- and business-specific licenses and permits, so you should take care to ensure that you are in compliance with all state and local laws and regulations. You should use the CalGold online permit assistance system to obtain a list of all state and local licenses and permits that may apply to your business.
If you would rather have a professional take care of your formation paperwork for you, you have a couple of options. The less expensive choice is to hire a business formation service to create your limited partnership.
While some service providers stick to less complicated business entities like limited liability companies, some also provide LP formations ― namely, LegalZoom and BizFilings. Currently ZenBusiness does not have this offering but does have regular LLC formation and business incorporation.
If you want the maximum possible degree of expertise, you should also consider hiring a business attorney to form your limited partnership. This is certainly a more expensive route, but if you want the peace of mind that every step is completed correctly ― and that all of your options have been thoroughly explored ― hiring a lawyer is a great option.
We highly recommend that you establish a business bank account so that your business and personal finances are maintained separately. This is important because it helps protect your personal assets, and also makes filing taxes much easier. Once you receive your EIN from the IRS, you’ll be able to use it to establish an account at the bank or credit union of your choice.
If your LP hires employees, then you are legally required to have both unemployment and workers’ compensation insurance. You will need to obtain workers’ compensation insurance through the private market, but you will pay for unemployment insurance through your business taxes. For further information, you should consult the California Department of Industrial Relations and the California Employment Development Department. After you obtain these legally required policies, it’s probably also a good idea to pursue general liability insurance, as well as some industry-specific policies.
Limited partnerships do not file business tax returns. Instead, the income is passed through the business entity to the partners, who then claim their share of profits or losses on their personal tax returns. Still, LPs do need to file an annual information return with the IRS, in which you report your business income, deductions, gains, and losses for the year.
California does not have any annual reporting requirements for Limited Partnerships. However, you will need to file any pertinent updates, such as a change in registered agent or the departure of a general partner, with the Secretary of State’s office in a timely manner.
We don’t recommend that you attempt to manage your business finances without the help of a professional. There is too much room for error, and a professional can ultimately save you time and money by guiding you on how to manage your business finances. At a minimum, enlist professional help to set you up with software and the steps for keeping up with your finances on a regular basis. Then, consult back with your accountant at least a couple of times per year – and especially at tax time – to ensure you’re keeping track of everything correctly.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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