Limited Partnerships PDF Print E-mail

A limited partnership is a partnership formed by two or more persons [Corp. Code §§ 15611(z), 15901.02(y)] that has one or more general partners and one or more limited partners (or their equivalents under another name) [Corp. Code §§ 171.5, 15501, 15611(n), (q), (r), 15901.02(m), (p), (q)].

A limited partnership is a hybrid form of business organization having some attributes of a general partnership and some attributes of a corporation; it provides a vehicle through which certain principals (limited partners) may avoid subjecting personal assets outside of their investment in the partnership to the claims of the partnership's creditors.

A limited partner is a partner whose participation in management is limited by statute or agreement and, assuming that limitation is honored, whose liability is ordinarily limited to the assets contributed to the partnership and any obligations for subsequent contributions [see Corp. Code §§ 15632, 15636, 15666, 15903.02, 15903.03; see also [2][b], below]. A partnership agreement may specify classes of general and limited partners, and if so, the agreement must define the rights, powers, and duties of the classes relative to each other [Corp. Code §§ 15631.5, 15645, 15903.07, 15904.09].

The Uniform Limited Partnership Act of 2008 (ULPA '08), set forth in Corp. Code §§ 15900-15912.07, became operative on January 1, 2008 [see Corp. Code § 15912.04]. Existing provisions governing limited partnerships, i.e., the Uniform Limited Partnership Act (ULPA) [Corp. Code §§ 15501-15533] and the California Revised Limited Partnership Act (CRLPA) [Corp. Code §§ 15611-15723], become inoperative and are repealed on January 1, 2010 [see Corp. Code §§ 15534, 15724]. Before that date, the new Act governs only [see Corp. Code § 15912.06(a)]:

  •     Limited partnerships formed on or after January 1, 2008; and
  •     Limited partnerships formed before January 1, 2008, which elect to be subject to the new Act.

On and after January 1, 2010, except as otherwise provided, the new Act will govern all limited partnerships [see Corp. Code § 15912.06(b)]. It will not affect any action commenced, proceeding brought, or right accrued before its operative date [see Corp. Code § 15912.07; see Ch. 16, Formation of Limited Partnerships ].

The formation and operation of a limited partnership, like a corporation or limited liability company, requires more formality than does the formation and operation of a general partnership. However, limited partnership formation requirements are minimal: a limited partnership must file a certificate of limited partnership with the Secretary of State and must have an oral or written partnership agreement [Corp. Code §§ 15611(y), 15621(a), 15901.02(z), 15902.01; see Ch. 16, Formation of Limited Partnerships ]. These documents govern the business operations of the entity.

A limited partnership may be organized for any lawful purpose, and may engage in any lawful business activity (whether or not for profit) except the banking business, the business of issuing policies of insurance and assuming insurance risks, or the trust company business [Corp. Code § 15901.04(b); see Corp. Code § 15503, 15616]. Limited partnerships may merge into one limited partnership, or with or into other business entities, including corporations, general partnerships, limited liability companies, business trusts, or for-profit unincorporated associations [Corp. Code §§ 15611(v), 15678.1, 15901.02(u), 15911.02, 16901, 23006].

Management and Control

A general partner in a limited partnership has exclusive management authority except as otherwise provided by law or the partnership agreement [Corp. Code §§ 15643(a), 15904.06; see Corp. Code § 15618, 15901.10]. Limited partners may not participate in management without losing their limited liability [Corp. Code § 15632, 15903.03]. A general partner in a limited partnership has, by and large, the same rights and powers as a partner in a general partnership [Corp. Code §§ 15509, 15643(a), 15904.06]. However, a single general partner in a limited partnership may have more freedom of management and control than a partner in a general partnership simply because the other limited partners do not share in the decision-making process.

Extent of Personal Liability

The liability of a general partner in a limited partnership is basically the same as that of a partner in a general partnership. The general partner in a limited partnership is personally liable for all partnership debts, obligations, and liabilities [Corp. Code §§ 15509, 15643(b), 15904.04].

The liability of limited partners is ordinarily limited to their capital contributions, any commitments for future contributions, and, when partnership assets are insufficient to satisfy partnership liabilities, any distributions received from the partnership [Corp. Code §§ 15632, 15666, 15903.13, 15905.09(b)]. However, this limited liability status may be lost if the proper formalities are not observed in the formation of the limited partnership. For example, limited liability is lost if the limited partner is named as a general partner in the certificate, or if the limited partner participates in the control of the business [see Corp. Code §§ 15632, 15903.03].

Availability of Capital

In addition to the sources of capital available to a general partnership, limited partners often personally guarantee loans or the limited partnership may sell limited partnership interests. These interests often appeal to investors because of the associated limited liability. However, the transfer of limited partnership interests is ordinarily restricted, sometimes making them somewhat less attractive as an investment than corporate shares. Limited partnership interests are considered securities and are regulated by federal and state securities laws unless the securities qualify for an available exemption [see 15 U.S.C. § 77c(a); Corp. Code § 25102(f), (h)].

Continuity of Existence

Under the CRLPA, a limited partnership is dissolved and its affairs must be would up on the earliest of the following [Corp. Code §§ 15642, 15681]:

  • The occurrence of an event specified in the agreement.
  • The written consent of the general partners and a majority in interest of the limited partners.
  • Unless otherwise provided in the partnership agreement, when a general partner ceases to be a general partner, unless (1) there is at least one other general partner and the remaining general partner (or all remaining general partners if more than one remains) continues the business of the limited partnership or (2) if no general partners remain, a majority in interest of the limited partners (or greater interest required by agreement) agree in writing to continue the business of the partnership and, within six months after the last remaining general partner has ceased to be a general partner, to admit one or more general partners.
  • The entry of a decree of judicial dissolution.
Ordinarily, the death, incompetence [Corp. Code § 15675], or withdrawal of a limited partner [Corp. Code § 15663], or the sale or assignment [Corp. Code § 15672] of a limited partner interest does not dissolve the entity.

Under ULPA '08, a limited partnership has a perpetual duration [Corp. Code § 15901.04(c); see Corp. Code § 15912.06(c) (exception for limited partnerships formed before January 1, 2008)].

A partnership is dissolved, and its activities must be wound up, only upon the occurrence of any of the following [Corp. Code § 15908.01]:

  • The happening of an event specified in the partnership agreement.
  • The consent of all general partners and of limited partners owning a majority of the rights to receive distributions as limited partners at the time the consent is to be effective.
  • After the dissociation of a person as a general partner:
  • If the partnership has at least one remaining general partner, and a consent to dissolve the partnership is given within 90 days after the dissociation by partners owning a majority of the rights to receive distributions as partners at the time the consent is to be effective; or
  • If the partnership does not have a remaining general partner, the passage of 90 days after the dissociation, unless before the end of 90 days consent to continue the activities of the partnership and admit at least one general partner is given by limited partners owning a majority of the rights to receive distributions as limited partners at the time the consent is to be effective; and at least one person is admitted as a general partner in accordance with the consent.
  • The passage of 90 days after the dissociation of the partnership's last limited partner, unless before the end of the period the limited partnership admits at least one limited partner.

Furthermore, on application by a partner, a court of competent jurisdiction may order dissolution of a partnership if it is not reasonably practicable to carry on its activities in conformity with the partnership agreement [Corp. Code § 15908.02].


Like a general partnership, a limited partnership is a separate tax-reporting entity for federal and state income tax purposes and must file an informational return [I.R.C. § 6031(a)]. Neither a limited partnership nor a general partnership is a separate taxable entity [I.R.C. § 701], with one exception. At the time either entity files its state information return, a limited partnership must pay a tax for the privilege of doing business in California [Rev. & Tax. Code §§ 17851.5, 17935; see Rev. & Tax. Code § 23153]. This tax is not deductible by the entity [Rev. & Tax. Code § 17220(c)].

Partnership income flows through to the individual partners in proportion to each partner's interest [I.R.C. § 702(a)]. A partner who actively participates in partnership business may use partnership losses to offset income from other sources, up to the amount of the partner's capital investment, plus the partner's allocable share of recourse debt [I.R.C. § 465(a)(1), (3)]. However, for a limited partner, the deductibility of losses is restricted by the ''passive activity'' rules that generally limit the deductibility of such losses in a tax year to the amount of passive activity income for the year [I.R.C. § 469(e)]. Disallowed losses are carried forward to the next taxable year until the amount of passive income equals the available passive losses or until the disposition of the investment [I.R.C. § 469(b), (g)]. This restriction often limits the incentive to invest as a limited partner, since, ordinarily, the taxable income a client is seeking to reduce is income earned by the client's active participation as a wage earner or a business owner, which the passive loss of a limited partnership investment cannot be used to offset [I.R.C. § 469(a)(1), (2)].

As with general partnerships, state law that classifies an entity as a limited partnership is not controlling for income tax purposes [Treas. Reg. § 301.7701-1(a)(1)]. Classification of an entity as a partnership rather than a corporation for federal tax purposes formerly required a determination that the entity had fewer corporate than noncorporate characteristics, and required a potentially complicated analysis of whether or not the entity possessed one or more of four corporate characteristics on which the regulations based this determination. However, regulations effective January 1, 1997 [Treas. Reg. §§ 301.7701-1-301.7701-3] abolished this approach and instead permit most unincorporated entities to elect to be taxed as a corporation or a partnership. Entities with only a single owner may elect to be classified as a single owner or to be disregarded as an entity separate from their owners [Treas. Reg. § 301.7701-3(a)].

California generally conforms to the federal entity classification rules under Treas. Reg. § 301.7701-2 [see Rev. & Tax. Code § 23038; see also FTB Notice 92-5 ]. The classification of a business entity as an association taxable as a corporation is determined under FTB regulations, which must be consistent with the federal regulations in effect on January 1, 1997, that classify a business entity as a partnership or an association taxable as a corporation, or disregard the separate existence of the business entity [Rev. & Tax. Code § 23038(b)(2)(B)(i)]. The classification of an eligible business entity as a partnership or an association taxable as a corporation is the same as the classification of the entity for federal tax purposes; if the separate existence of the LLC is disregarded for federal tax purposes (for example, because the LLC has a single owner), the separate existence will be disregarded for California purposes [Rev. & Tax. Code § 23038(b)(2)(B)(ii), (iii)].


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