The California Uniform Partnership Act of 1994, codified in the state’s Corporations Code, is the law that governs how general partnerships form, operate, and end in California. Its default rules make every partner personally liable for the business’s debts, treat each partner as an agent who can bind the others, and impose fiduciary duties that survive whether or not anyone signed an agreement. Because the Act treats you as a partner the moment you and someone else start running a business together for profit, you can be bound by it without ever intending to be.
How You End Up in a Partnership
Under Corporations Code Section 16202, a partnership forms whenever two or more people carry on as co-owners of a business for profit, whether or not they intend to create a partnership.1California Legislative Information. California Corporations Code – Section 16202 Intent is irrelevant. Split revenue from a side business with a friend, share decision-making, and California treats the two of you as partners with every duty and liability that follows.
No filing is required. Unlike a corporation or LLC, a general partnership needs nothing from the Secretary of State to exist. The agreement can be oral or written, and while oral agreements are enforceable, relying on one invites conflict. A written agreement lets you set profit splits, management responsibilities, capital contributions, exit terms, and dispute procedures. Without one, the statutory defaults apply, and they may not match what you assumed.
The most consequential default: if the agreement is silent, every partner gets an equal share of profits and bears losses in proportion to that share.2Justia. California Corporations Code – Sections 16401 Through 16406 Capital contributions do not change this. If one partner put in $200,000 and the other put in $10,000, they still split 50/50 unless they agreed otherwise. California imposes no minimum capital requirement, and partners can contribute cash, property, or services in any mix.
What Any Partner Can Do to Bind the Others
Every partner is an agent of the partnership. Section 16301 provides that anything a partner does in the ordinary course of business binds the partnership, unless the partner lacked authority and the person dealing with them knew it.3California Legislative Information. California Corporations Code – Section 16301 Your partner can sign a contract, take on debt, or commit the business to an obligation, and you are on the hook even if you never approved it. Actions outside the ordinary course only bind the partnership if the other partners authorized them, but the line between routine and extraordinary is not always clear.
Partners can file a Statement of Partnership Authority (Form GP-1) with the Secretary of State to publicly define who has authority to act and what limits apply.4California Secretary of State. Instructions for Completing the Statement of Partnership Authority The filing is optional but creates a conclusive presumption of authority in favor of third parties who rely on it without knowledge that authority has been revoked or limited. For real property, a certified copy must be recorded in the county where the property sits for the statement to bind buyers and lenders. At least two partners must sign.
Duties Partners Owe Each Other
Partners owe each other fiduciary duties, and Section 16404 spells out what that means. The two core obligations are loyalty and care, and both are governed by an overarching duty of good faith and fair dealing.
Duty of Loyalty
The duty of loyalty has three components. A partner must account to the partnership for any profit or benefit derived from partnership business or from using partnership property. A partner cannot deal with the partnership on behalf of someone with an adverse interest. And a partner cannot compete with the partnership before dissolution.5California Legislative Information. California Corporations Code – Section 16404
The no-competition rule catches people off guard. If you are a partner in a consulting firm, you cannot quietly start a competing firm on the side. Business opportunities within the partnership’s scope belong to the partnership, not to you individually. A court can order you to hand over profits and pay damages.
Duty of Care
The duty of care is narrower than most people expect. A partner only breaches it by engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.5California Legislative Information. California Corporations Code – Section 16404 Ordinary bad business judgment does not, by itself, breach this duty. The bar is deliberately high, so partners are not second-guessing each other over every decision that turned out badly. Good faith still applies, so the narrow definition is not a license to act in bad faith.
Default Rights Each Partner Has
The Act gives every partner a baseline set of rights that apply unless the partnership agreement changes them. All four below come from Section 16401.2Justia. California Corporations Code – Sections 16401 Through 16406
- Equal management rights, regardless of capital contribution. Ordinary decisions are made by majority vote; extraordinary ones like admitting a new partner typically require unanimity.
- Equal share of profits and a proportionate share of losses.
- Indemnification for payments made and liabilities incurred in the ordinary course of business or to preserve partnership property.
- Reimbursement for advances beyond the agreed capital contribution.
The indemnification right matters when you pay a vendor or settle a claim on the partnership’s behalf while acting within your authority. The partnership owes you back, but only if you acted in the ordinary course and in good faith. Partners also have the right to inspect and copy the partnership’s books and records, and this right is difficult to restrict by agreement.
Personal Liability for Partnership Debts
This is the feature that makes many business owners rethink the general partnership. Partners are jointly and severally liable for all partnership debts and obligations. Jointly and severally means a creditor can pursue any single partner for the full amount, not just that partner’s proportionate share.
Liability extends to wrongful acts committed by any partner in the ordinary course of business. If your partner’s negligence injures a customer, the resulting judgment can reach your personal assets. The same applies to breach of contract claims against the partnership. Every partner’s personal wealth effectively guarantees every other partner’s conduct.
The combination of broad agency authority and unlimited personal liability makes partner selection one of the most consequential decisions in the business. Liability insurance helps but does not eliminate the exposure. Many professionals who want partnership governance without this risk register as a limited liability partnership instead.
Registering as an LLP
California allows general partnerships to register as limited liability partnerships by filing with the Secretary of State.6Justia. California Corporations Code – Sections 16951 Through 16962 An LLP shields partners from personal liability for partnership debts arising from other partners’ acts. The name must include “Limited Liability Partnership,” “LLP,” or a similar designation.
There is a catch. California’s LLP statute is designed primarily for licensed professionals, and every LLP must maintain security against claims, typically professional liability insurance. Minimum coverage is $1,000,000 for partnerships with five or fewer licensed persons, scaling up to a cap of $5,000,000 for larger firms. Alternatively, the partnership can maintain a specified level of net worth.6Justia. California Corporations Code – Sections 16951 Through 16962 In practice, most California LLPs are law firms and accounting firms.
Registering as an LLP also triggers the $800 annual franchise tax. A plain general partnership owes no annual tax to the state, while LPs, LLPs, and LLCs classified as partnerships all pay the $800 minimum.7California Franchise Tax Board. Partnerships
Tax Filings You Cannot Skip
Partnerships do not pay income tax at the entity level. Income, deductions, and credits flow through to partners on Schedule K-1s. But the partnership itself has significant filing obligations at both levels.
Federal Form 1065
Every general partnership must file IRS Form 1065 even if it had zero income or operated at a loss. Calendar-year partnerships file by March 15, with an automatic six-month extension available on Form 7004. Missing the deadline triggers a penalty of $255 per partner per month for up to 12 months.8Internal Revenue Service. Failure to File Penalty For a five-partner firm, that is $15,300 in one year of noncompliance. Small partnerships of 10 or fewer partners where all partners are individuals may qualify for penalty relief under Revenue Procedure 84-35 if each partner timely reported their share on their own return.
Self-Employment Tax
General partners are self-employed for federal tax purposes and do not receive W-2 wages. Each partner owes self-employment tax of 15.3% on their share of partnership income: 12.4% for Social Security on earnings up to $184,500 in 2026, and 2.9% for Medicare on all earnings.9Social Security Administration. Contribution and Benefit Base An additional 0.9% Medicare tax applies to earnings above $200,000 for single filers or $250,000 for joint filers. Payment runs through quarterly estimated taxes.
California Form 565
A partnership doing business in California or earning California-source income must file Form 565 with the Franchise Tax Board. The calendar-year deadline is March 15.10California Franchise Tax Board. 2025 Instructions for Form 565 Partnership Tax Booklet General partnerships do not owe the $800 franchise tax, but LPs, LLPs, and LLCs classified as partnerships do.7California Franchise Tax Board. Partnerships
When a Partner Leaves
Dissociation is the legal term for a partner departing without necessarily ending the business. Section 16601 lists the triggering events, including voluntary withdrawal, events specified in the partnership agreement, expulsion by agreement or unanimous vote, judicial expulsion for wrongful conduct or persistent breach, bankruptcy or insolvency, and a partner’s death or incapacity.11California Legislative Information. California Corporations Code – Section 16601
Dissociation does not automatically dissolve the partnership. In many cases the remaining partners can buy out the departing partner’s interest and continue operating. The distinction between dissociation and dissolution matters because the legal consequences are different.
When the Partnership Itself Ends
Dissolution triggers the end of active business and starts the winding-up process. Section 16801 limits dissolution to specific circumstances.12California Legislative Information. California Corporations Code – Article 8, Winding Up Partnership Business For a partnership at will, dissolution occurs when at least half the partners express the will to dissolve. For a partnership with a definite term or specific undertaking, dissolution requires unanimous consent, expiration of the term, completion of the undertaking, or a triggering event within 90 days of certain dissociations. A court can order dissolution when the economic purpose is frustrated, a partner’s conduct makes it impracticable to continue, or the business cannot reasonably be carried on under the agreement.
Once dissolution is triggered, partners retain authority only to complete unfinished business, collect debts owed to the partnership, and fulfill existing contracts. They should not take on new business.
Section 16807 sets the order of settlement. Partnership assets, including any required additional partner contributions, go first to creditors. Partners who are also creditors are included in that group. Any surplus is distributed to partners based on the net balance in their capital accounts.13California Legislative Information. California Corporations Code – Section 16807
If assets fall short of debts, partners must contribute the shortfall in proportion to their share of losses. If one partner cannot pay, the others cover that partner’s share and can later seek reimbursement.13California Legislative Information. California Corporations Code – Section 16807 Even after settlement, partners remain personally liable for partnership obligations not known at the time. Notifying creditors, customers, and other stakeholders of the dissolution is not optional in practice; failing to do so can expose partners to new obligations incurred by someone who reasonably believed the partnership was still operating.
Resolving Disputes Between Partners
Partnership disputes escalate quickly because financial and personal stakes are intertwined. Many partnership agreements require mediation or arbitration before litigation. Mediation is nonbinding facilitation; arbitration produces a binding ruling and tends to be faster and more private than court. Including these clauses is one of the strongest arguments for having a written agreement.
When informal resolution fails, Section 16405 lets a partner sue the partnership or another partner to enforce rights under the agreement, enforce statutory rights (including fiduciary duties, the right to an accounting, and the right to compel dissolution), or protect interests that exist independently of the partnership relationship.14California Legislative Information. California Corporations Code – Section 16405 The right to an accounting is particularly useful when a partner suspects financial mismanagement or self-dealing, because it forces a detailed examination of the books.
Available remedies include monetary damages, an order requiring the breaching partner to hand over improperly obtained profits, and injunctive relief to stop ongoing harmful conduct. A court can also order dissolution when misconduct makes it impracticable to continue.