How to Start a Partnership in California
If you’re starting a business in California you need to decide on the business structure you’ll operate under. For most California businesses with 2 or more owners, the choice is between a partnership, LLC or Corporation. In this article, we’ll go over the pros and cons of forming your business as a general partnership and how to start a partnership in California.
A general partnership is the easiest and most simple form for businesses with 2 or more owners. A general partnership can be started in California without any formal registration with the state, outside of required business licenses and tax-related filings applicable to all businesses.
The lack of any legal formation paperwork to get started is the primary advantage that general partnerships offer compared to a California LLC or corporation. LLCs and corporations require legal paperwork to be filed with the California Secretary of State to be formed along with a state filing fee. While partnerships are easier and cheaper to get started than LLCs or corporations, California business owners should also consider liability protection and taxation.
One of the main areas that a business owner should keep in mind when choosing their business structure is their personal liability risk. In a general partnership, all partners are subject to unlimited liability risk. This means that if their business is sued or has outstanding debts, their personal assets like their savings, home, or car could be used to pay off the debts. This is a significant disadvantage of general partnerships compared to a California corporation or LLC. LLCs and corporations are recognized as separate legal entities from their owners, and as a result, they provide limited liability protection for their owners.
Partnerships are not subject to corporate taxation and are treated as a pass-through taxation entity. This means that the business itself is not responsible for paying taxes; instead, the business’ profits are passed to the owners, who then pay tax on those earnings on their personal tax returns. By default, multi-member LLCs are treated the same as a partnership for tax purposes. The pass-through taxation of partnerships and LLCs can allow for a lower overall amount of taxes to be paid when compared to a corporation. Corporations are subject to “double-taxation” by default. They must first pay corporate taxes before distributing profits to their owners, who then must also pay taxes on that distributed income.
With this being said, LLCs have a unique advantage over partnerships as they have the flexibility to elect for either S Corporation taxation treatment by the IRS. This can allow a qualifying LLC to save a sizeable amount of money by reducing the business’ self-employment tax liability. Thus, partnerships lack this ability and are subject to the maximum self-employment tax liability.
If you want to learn more about the differences between LLCs and Partnerships, read our LLC vs Partnership comparison guide.
If you have chosen to start your business as a general partnership, there are six steps that you’ll need to take to form a partnership in California.
As a general partnership in California, you’ll need to choose a business name. By default, Partnerships will need to use the partners’ last names in the business name. You’ll often see professional trades like lawyers using names like this, such as “Smith, Williams and Partners”. However, this is not ideal for many businesses as they don’t follow the basic rules for a good business name, as we cover in our How to Come up with a Business Name guide.
Luckily, partnerships can choose to get a California Fictitious Business Name. If you choose to go this route, your name must be unique from other registered Fictitious Business Names so that it’s not confused with another existing business or government entity. You can ensure that your desired name is not in use by searching these government databases:
Outside of these government databases, it’s also highly recommended that you conduct a website domain name search to ensure that the .com version of your business name is available for registration. Since online searches are one of the main ways, people will find your business, having the .com version of your business name is the easiest way to ensure your best chance of showing up first when people search your name. You can register a domain for $8.88 with namecheap (as compared to $11.99 with GoDaddy), so even if you don’t plan on creating a website, you lock in your domain so no one else can use it.
After you have verified your business name is available, you’ll need to file your Fictitious Business Name. In California, your Fictitious Business Name will need to be filed with the local county clerk’s office where the business is located. The California Fictitious Business Name filing fee varies from county to county. The price of a California Fictitious Business Name filing ranges from $10 to $66, with the average being about $35.
If you want detailed help on filing your Fictitious Business Name visit our guide How to Get a California Fictitious Business Name.
If you would like assistance, you can use a third-party filing service to complete your Fictitious Business Name filing. Using a filing service can help to ensure that your Fictitious Business Name application is completed correctly and has the highest chances of being approved on the first attempt.
While it’s not a legal mandate, you should create a partnership agreement. A partnership agreement is a contract that defines many of the important items about the partnership’s operations and the relationships between the business partners. This includes:
- Ownership percentages
- How profits will be distributed
- The managerial powers and responsibilities of each partner
- How the partnership can be terminated
- How partnership can leave or have their ownership bought out
Without a partnership agreement, you could end up with major disputes that can destroy a business. If you don’t have a partnership agreement, a judge could end up deciding the fate of your business, all because a formal agreement was not completed when the business was started.
Most partnerships will have at least one or more business licenses or permits that they’ll need to operate legally in California. The types of business licenses or permits you will need are highly dependant upon the nature of your business. A full list of all California state-level business licenses and permits, which can be found here.
The most common types of business licenses and permits needed in California include:
- Sellers Permit
- Fire Department Permit
- Sign Permit
- Health Department Permit
- City and/or County Business License
If your business activity is federally regulated you may need to obtain a license or permit from a federal agency. A full list of federal business licenses and permits can be found at SBA.gov.
Since the business licenses and permits your California partnership will need can vary widely based on the activities of your business, you may want to purchase a business license and permit research package. This can help ensure that you get all the business licenses and permits required for your specific situation to be legally compliant.
If you operate your California business as a partnership, you must obtain an EIN from the IRS. EIN is an acronym for Employer ID Number, which is sometimes referred to as a Federal EIN, FEIN, Tax ID, or IRS Tax ID. EINs are a nine-digit ID number issued by the IRS for tax reporting and come in the format XX-XXXXXXX. You can apply for an EIN online for free using the IRS’ EIN Assistant.
Once you have completed your EIN application your EIN will be issued immediately. Be sure to save your EIN confirmation letter PDF after the EIN is issued as this will be required to open your business bank account.
Related: What is an EIN
Once you have registered your partnership’s Fictitious Business Name and obtained an EIN, you can open a business bank account. Opening a business bank account helps keep your business and personal transactions separate, making your accounting and bookkeeping much easier. To open a business bank account, you’ll want to schedule an appointment with your bank of choice and take the required documents with you, including:
- Approved California Fictitious Business Name
- Partnership Agreement
- EIN Confirmation or Verification Letter (Form CP 575 or 147C)
Steps to Consider after your Partnership is Formed
Once your California partnership has been formed, you’ll also want to complete these steps: