Partnership Agreements in California

More California partnerships start by accident than on purpose. Two people split the profits from a side business, nobody files anything, and the Corporations Code treats them as partners with rules they never read. I draft partnership agreements for owners who want to pick their own rules, and this page covers the defaults, the clauses that override them, and the few terms the law won’t let you change.

Do I need a written partnership agreement in California?

Not legally, but you need one in practice. California’s partnership statute, the Uniform Partnership Act of 1994, starts at Corp. Code § 16100. It treats the partnership agreement as whatever the partners agreed to, “whether written, oral, or implied” (Corp. Code § 16101).

The partnership itself needs no filing. The association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership (Corp. Code § 16202(a)). A person who receives a share of the profits of a business is presumed to be a partner, unless the profits were paid as wages, rent, or installments on a debt, or for another listed reason (Corp. Code § 16202(c)(3)).

That presumption is how accidental partnerships happen. A contractor who pays a friend 30 percent of the profit on every job for finding customers, with no written terms, may have a partner instead of a referral source. An oral agreement is still an agreement, but proving its terms after a falling-out is expensive, and the statute fills every gap you can’t prove.

What rules apply if a California partnership has no agreement?

The statute’s defaults, which assume equal partners who all work in the business and agree on everything important. The partnership agreement governs relations among the partners, and the statute governs only where the agreement doesn’t provide otherwise (Corp. Code § 16103(a)).

Question	Default rule with no agreement	Authority
How are profits split?	Equally, whatever each partner contributed. Losses follow the profit share.	§ 16401(b)
Who manages?	Every partner has equal rights in management.	§ 16401(f)
Ordinary decisions	A majority of the partners.	§ 16401(j)
Anything outside the ordinary course, or amending the agreement	Every partner must consent.	§ 16401(j)
Pay for a partner who works in the business	None, except reasonable pay for winding up.	§ 16401(h)
Adding a partner	Every partner must consent.	§ 16401(i)
Can one partner bind the partnership?	Yes, for acts apparently in the ordinary course of business.	§ 16301
Personal liability	Every partner, jointly and severally, for all partnership obligations.	§ 16306(a)
A partner leaves or dies	The partner is dissociated, and the partnership must buy out the interest.	§ 16601, § 16701

Take an example. Dana puts $80,000 into a Camarillo garden design firm, and Luis contributes his design work and no cash. With no agreement, each partner is entitled to an equal share of the partnership profits (Corp. Code § 16401(b)). Each partner is deemed to have an account credited with the money plus the value of any other property the partner contributes (Corp. Code § 16401(a)). So Dana’s $80,000 is tracked, but the yearly profit is split 50/50, and Luis draws no salary for his work, because a partner isn’t entitled to pay for services except during winding up (Corp. Code § 16401(h)). Each of them probably expected something different.

The authority rule is the one that costs money. Each partner is an agent of the partnership, and a partner’s act apparently carrying on the business in the ordinary course binds the partnership unless the other side knew the partner lacked authority (Corp. Code § 16301). One partner can sign a lease or a supply contract, and both partners are on the hook for it.

Am I personally liable for my partner’s business debts?

Yes, in a general partnership. All partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law (Corp. Code § 16306(a)). A creditor can collect the whole debt from whichever partner has the money.

A partnership agreement can’t fix that, because it binds only the partners, not the business’s creditors. What the agreement can do is make the partners share the loss among themselves. To keep a creditor away from your house, you need a different entity. A person admitted as a partner into an existing partnership isn’t personally liable for partnership obligations incurred before admission (Corp. Code § 16306(b)), but that’s a narrow protection.

California’s limited liability partnership is open only to certain licensed professions. The statute defines the services for a professional limited liability partnership as architecture, public accountancy, engineering, land surveying, and law (Corp. Code § 16101). Everyone else who wants a shield uses an LLC or a corporation. My comparison of partnerships and multi-member LLCs covers the choice, and the entity formation page covers converting.

What should a California partnership agreement include?

Every term where the statute’s default doesn’t match what the partners expect. The clauses below are the ones I draft in nearly every partnership agreement.

1. Contributions and capital accounts. Who puts in what, whether more can be required, and whether a partner who advances extra money is repaid first. A partner’s advance beyond the agreed capital is reimbursed and treated as a loan that accrues interest (Corp. Code § 16401(e)).
2. Profits, losses, and draws. The split, whether it follows capital or effort, and a guaranteed payment for partners who work in the business.
3. Management and authority. Which decisions need a majority, which need everyone, and a dollar limit above which one partner can’t sign alone.
4. Admission of new partners. The vote needed and the terms. See my guide to adding an owner to an LLC for the parallel LLC process.
5. Transfer restrictions. A transfer of a partner’s transferable interest in violation of a restriction in the partnership agreement is ineffective as to a person with notice of the restriction (Corp. Code § 16503(f)).
6. Term or at will. Whether the partnership lasts for a set term or a project, or continues at will. The answer changes what a withdrawal does, as explained below.
7. Buyout terms. The price formula, the payment schedule, and the triggers. These terms overlap with a buy-sell agreement.
8. Death and disability. What the estate receives, and when.
9. Non-competition on exit. California lets a partner agree not to carry on a similar business within a specified area where the partnership did business, upon or in anticipation of dissolution or the partner’s dissociation (Bus. & Prof. Code § 16602). It’s one of the few non-competes California enforces, and it has to be drafted to fit the statute. My non-compete guide covers the general rule.
10. Dispute resolution. Mediation first, then arbitration or court, and which county.

What can’t a partnership agreement change?

A short list of protections the statute puts out of reach. The partnership agreement may not eliminate the duty of loyalty, though it may identify specific types of activities that don’t violate it if that isn’t manifestly unreasonable (Corp. Code § 16103(b)(3)).

The same section bars an agreement from unreasonably reducing the duty of care, eliminating the obligation of good faith and fair dealing, unreasonably restricting a partner’s right of access to the books and records, or varying the power to dissociate as a partner (Corp. Code § 16103(b)). The agreement also can’t take away a court’s power to expel a partner for wrongful conduct.

The duties themselves are set out in the statute. A partner’s duty of loyalty includes accounting to the partnership for any benefit derived from partnership business or property, refraining from dealing with the partnership on behalf of an adverse party, and refraining from competing with the partnership before dissolution (Corp. Code § 16404(b)). The duty of care is limited to refraining from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law (Corp. Code § 16404(c)).

What happens when a partner leaves?

The partner is dissociated, and in most cases the partnership has to buy the partner’s interest. A partner is dissociated on the partnership’s notice of the partner’s express will to withdraw, and also on death, expulsion, bankruptcy, and other listed events (Corp. Code § 16601). A partner has the power to dissociate at any time, rightfully or wrongfully (Corp. Code § 16602(a)).

If a partner is dissociated, the partnership shall cause the dissociated partner’s interest to be purchased for a buyout price set by statute (Corp. Code § 16701(a)). The price is based on the greater of the liquidation value or the value from a sale of the entire business as a going concern without the dissociated partner (Corp. Code § 16701(b)). If no agreement on the purchase is reached within 120 days after a written demand for payment, the partnership must pay in cash the amount it estimates to be the buyout price plus accrued interest (Corp. Code § 16701(e)).

That default is often unaffordable. A going-concern value, payable in cash within about four months, can force the remaining partners to borrow or sell. A partnership agreement can set its own price and let the partnership pay over several years with interest and security.

The at-will trap for two-partner firms

In a partnership at will, the partnership is dissolved by the express will of at least half of the partners, and a partner’s withdrawal counts as that partner’s expression of will to dissolve (Corp. Code § 16801(1)). With two partners, one partner is half. So in a two-partner at-will firm with no agreement, either partner can force the business to wind up by quitting.

The statutory buyout doesn’t help in that case. Section 16701 doesn’t apply to a dissociation that occurs within 90 days before a dissolution (Corp. Code § 16701.5(a)). Instead of a buyout, the partners wind up the business and divide what’s left. The fix is a partnership agreement that sets a term, or that says a withdrawal doesn’t dissolve the partnership and triggers the agreed buyout instead.

Leaving early can also cost the departing partner. A dissociation is wrongful if it breaches an express term of the partnership agreement, or, in a partnership for a definite term or particular undertaking, if the partner withdraws before the term ends (Corp. Code § 16602(b)). A partner who wrongfully dissociates is liable for the damages caused (Corp. Code § 16602(c)). Once the partnership is fighting over those damages, both sides need litigation counsel. My guide to business divorce and partner buyouts covers the options before it gets there.

Can a partner’s creditor or ex-spouse take over the partnership?

Not the management. The only transferable interest of a partner is the partner’s share of profits and losses and the right to receive distributions, and the interest is personal property (Corp. Code § 16502). A transfer doesn’t let the transferee participate in management or inspect the books while the partnership continues (Corp. Code § 16503(a)).

A partner’s judgment creditor can ask a court to charge the partner’s transferable interest, and the court may order a foreclosure of the charged interest at any time (Corp. Code § 16504(b)). The other partners can redeem the charged interest before foreclosure (Corp. Code § 16504(c)). A spouse is different, because in California a partnership interest acquired during marriage is usually community property. The agreement’s divorce clause and a signed spousal consent, described in my buy-sell guide, deal with that.

Is a family limited partnership the same thing?

No. A limited partnership is formed under a separate chapter of the Corporations Code, and the general partnership statute excludes partnerships formed under Chapter 4.5, commencing with Section 15900 (Corp. Code § 16101). A limited partnership files with the Secretary of State and has limited partners who don’t manage. Families use it for estate planning, covered in my guide to family limited partnerships.

What should I ask my CPA?

A partnership files its own information returns, and each partner reports a share of the income on a personal return. Take these questions to your CPA before the agreement is signed.

• Should profits be allocated by capital, by effort, or by a waterfall that pays back capital first?
• How should guaranteed payments to working partners be set, and how are they taxed?
• Who will serve as the partnership representative in a federal audit?
• Would an LLC taxed as a partnership give the same tax result with better liability protection?

How I help

I draft partnership agreements and amendments, and I review agreements someone else drafted before you sign. When the partners want liability protection, I usually recommend forming an LLC and moving the business into it with an operating agreement that carries the same economic deal. If a partner has already sued or a dissolution fight has started, you need litigation counsel, and I can refer you.

Frequently asked questions

Is a verbal partnership agreement legal in California?

Yes. California treats a partnership agreement as the agreement of the partners whether written, oral, or implied. The problem is proof, and any term you can’t prove is replaced by the statute’s default.

Does a California general partnership have to register with the state?

No filing is required to form one. A partnership doing business under a name that doesn’t include the partners’ surnames usually needs a fictitious business name statement with the county, covered in my DBA guide.

How are profits split in a partnership without an agreement?

Equally among the partners, no matter who contributed more money or works more hours. Losses follow the same shares. Each partner’s contributions are tracked in a capital account, which matters when the partnership winds up.

Can one partner sign a contract without the other?

Yes, for anything that looks like ordinary partnership business, and the partnership is bound unless the other party knew the partner lacked authority. A partnership agreement can limit a partner’s authority among the partners, but it doesn’t bind an outsider who didn’t know about the limit.

What happens to a partnership when a partner dies?

The partner is dissociated, and unless the partnership dissolves, it must buy out the interest from the estate at the statutory price. A partnership agreement can set a different price and payment schedule, and life insurance can fund it.

Can a partner be kicked out of a partnership in California?

Yes, under the agreement’s expulsion terms, by unanimous vote of the others in a few narrow situations such as a transfer of the partner’s whole interest, or by a court for wrongful conduct or a material breach. The partnership then owes the expelled partner the buyout price, less damages if the dissociation was wrongful.