Are you looking to run a business with one or more partners in the state of California?
The simplest way to do this is to form a California general partnership, which at its core is essentially just a handshake agreement between two (or more) people to operate a business together. However there are still a few formal steps you should plan to take while setting up a general partnership, and this guide covers each of those steps in detail.
General partnerships are just one of several ways for multiple people to co-own a business, so in this guide we’ll also describe how the general partnership compares to some other more formal business structures in California.
How to Become a California General Partnership
If you want to start a general partnership in the state of California, there is no formal business registration process to complete.
To form a California general partnership, you simply need to start working with your partner or partners. In addition, unlike corporations or LLCs, there aren’t any formation fees or ongoing maintenance fees associated with filings like annual reports.
While there are no formal filing requirements for forming a general partnership in California, the state does encourage you to file a Statement of Partnership Authority with the California Secretary of State. This form allows you to officially register the terms of your partnership with the State of California, but you may still form your GP without this form.
While the actual legal requirements are incredibly simple, there are still some other steps that you might want to take, depending on your preferences and your goals for the company. Let’s discuss the additional steps that may or may not suit your business needs.
If you don’t want to use your personal name as your official business name, you can acquire a doing business as (DBA) name from the state of California. With a DBA, you can use an assumed name in an official capacity, which is a great way to attract customers, as most people find that a business name adds legitimacy and professionalism to a business, as opposed to simply using the owners’ own names.
With a DBA, your general partnership can also open business bank accounts using the assumed name, which is another way to increase the professional aspect of your company. After all, it looks much better to have your company name on your checks, rather than just writing checks from your personal accounts.
You can begin the process of acquiring a DBA for your California general partnership by running a business entity search to see if your desired DBA is already taken. Then, to secure your DBA, you must file a Fictitious Business Name Statement in the county where your business is located. You can search for your local county clerk’s office here. Finally, to complete the process of securing your DBA, you will need to publish it in a county newspaper for four weeks in a row.
Do you want more information on DBA registration in California? Take a look at our full article on the subject.
Get Your Business Domain
To fully embrace the business name, register your URL. With GoDaddy you’ll be able to quickly build a company website so that nobody else can use or take it.
Register for Taxes
Other than the fact that general partnerships have more than one owner, the other major difference between a sole proprietorship and a partnership is the fact that a general partnership needs to acquire a federal tax ID number, otherwise known as an EIN.
While sole proprietors can get away with just using their personal social security number, the partnership needs an EIN because ― even though partnerships do not file business tax returns ― it needs to file an annual information return with the IRS.
In addition to the EIN, your business may need to register for state or local taxes.
All California GPs are responsible for paying California Franchise Tax, which is a business income tax calculated from the net income of your business. However, regardless of your net income, you must pay a minimum of $800 to the Franchise Tax Board each year.
Additionally, California general partnerships that sell goods or products will need to register for sales and use tax, and depending on the nature of your business, you may need to pay industry-specific taxes, such as those on rental properties. In order to determine your tax obligation, you should register your business with the California Tax Service Center. This convenient online portal will automatically register you to pay any taxes that your general partnership is liable for.
Determine License and Permit Requirements
The state of California does not have a general business license that all general partnerships are required to obtain. However, depending on what industry you operate in, your business may need licenses or permits to enable you to run your company in a compliant fashion.
The State of California makes finding all state and local licenses that may apply to your business easy with the CalGold online permit assistance system, which allows you to search hundreds of industry-specific permits and licenses that may apply to your business.
In addition to state-level licenses, you should also take care to ensure that you are also in compliance with all local licensing and permitting requirements. California’s major cities – Los Angeles, San Diego, San Jose, San Francisco, and Fresno – each have their own individual requirements.
What Is a General Partnership?
At its core, the general partnership bears the most similarities with the sole proprietorship. Both are unincorporated business entities that are viewed as extensions of their owners as people, rather than as separate legal entities. General partnerships often don’t even have business names, as they can be operated using the owners’ personal names.
Let’s take a look at two of the most important differences between general partnerships and formal business entities:
1) Taxation and Signature Requirements
Due to the lack of legal distinction between the general partnership and its owners, the “pass-through” model of taxation applies to this type of company. This means that the profits and losses of a partnership are claimed on the owners’ personal tax returns. Along those same lines, general partnership owners can sign business contracts using their own names instead of signing on behalf of the company, and customers are also welcome to write checks to the owners personally.
2) No Asset Protection
The most important distinction between general partnerships and formal business structures like corporations or limited liability companies (LLCs) is the issue of personal asset protection. In a general partnership, if your business is sued, your creditors are free to pursue your personal assets, including but not limited to your house, car, and even the contents of your personal checking account.
On the other end of the spectrum, owners of LLCs and corporations enjoy limited liability protection, which means that for the most part, creditors can only go after business assets, and the personal assets of the ownership group are left intact.
The general partnership is a much simpler business for multiple owners than a corporation or a limited liability company.
The state of California doesn’t require any official formation for general partnerships, and they’re also not required to pay any formation fees or participate in ongoing maintenance filings like annual reports. However, the general partnership as a business structure has some serious weaknesses as well, like the lack of personal asset protection that leaves owners’ assets exposed to potential lawsuits.
We hope this article helped you determine whether you’d like to form a California general partnership, or if there’s another business type that would better suit your needs. As always, we wish you a successful business future!