How to Establish a Partnership in California

This is a guide to forming a partnership in the state of California. For information on other California business entities, see Nolo's section on Starting a Business in California.

A partnership (also known as a general partnership) is created whenever two or more people agree to do business together for profit, even if there is no intent or written agreement to form a partnership. While there are no formal filing or registration requirements needed to create a partnership, partnerships must comply with registration, filing, and tax requirements applicable to any business. There are also some steps every partnership should take to make sure they follow sound business practices when they start their new venture.

Here are the steps you should take to form a partnership in California:

1. Choose a business name.
2. File a fictitious business name statement with the county clerk.
3. Draft and sign a partnership agreement.
4. Obtain licenses, permits, and zoning clearances.
5. Obtain an Employer Identification Number.

To find out how to establish a partnership in any other state, see Nolo's 50-State Guide to Forming a Partnership. To read more about partnerships in general (including the difference between a partnership and limited partnership), see Nolo's section on Partnerships.

1. Choose a Partnership Name

In California, a partnership may use the surnames of the individual partners or may use a fictitious business name. If you plan to use a fictitious business name, it must be distinguishable from the name of any other company currently on record. It is also a good idea to choose a name that is not too similar to another registered business because of common law and federal trademark law protections. To make sure your business name is available, run a search in the following government databases:

• California Secretary of State
• U.S. Patent & Trademark Office: (Click on the TESS link under Tools.)

2. File a Fictitious Business Name

If you use a business name that is different from the surnames of the individual partners, California requires you to file a fictitious business name statement in the office of the county clerk where you intend to do business. The California State Association of Counties provides a list of county websites where you can obtain more information and forms for filing a fictitious business name statement. The filing fee is $26. You will also need to publish the fictitious business name in a county newspaper for four weeks.

3. Draft and Sign a Partnership Agreement

A partnership agreement is not a mandatory legal requirement for establishing a partnership. However, it is a very important step to ensure there are no misunderstandings between you and your partners. A well-drafted partnership agreement will help you decide in advance how to handle certain situations.

Here's a list of some items that should be covered in your partnership agreement:

• each partner's contribution to the partnership
• the allocation of profits, losses, and draws
• the partners' authority and management duties
• voting rules for decision-making
• how to admit new partners
• the withdrawal or death of a partner, and
• how to resolve disputes.

Even well intentioned, honest partners can find themselves in a legal battle if they do not have a written partnership agreement memorializing their initial purposes. Your partnership agreement can always be amended at a later date should circumstances or conditions change. For help creating your partnership agreement, see Form a Partnership: The Complete Legal Guide, by Denis Clifford and Ralph Warner (Nolo),

4. Obtain Licenses, Permits, and Zoning Clearance

Your business may need to obtain business or professional licenses depending on the type of business activity you are engaged in. California provides a comprehensive database of every profession that requires a license by a partnership. You can obtain this information by going to CalGold, a service of the California Governor's Office of Business and Economic Development. In addition, local regulations, including licenses, building permits, and zoning clearances, may apply to your business. You will need to check with your city and county governments for more information.

5. Obtain an Employer Identification Number

Partnerships that wish to have employees need to obtain an Employer Identification Number, or EIN. This is a nine-digit number issued by the IRS to keep track of businesses. All businesses with employees are required to report wages to the IRS using their EIN. Registering for an EIN can be done online at the IRS website.

Even if you don't have employees, you may want to obtain an EIN. Some banks require one to open a bank account and it can reduce the risk of identity theft.

In California, businesses are required to report taxes and file various employee reports. You may need to use your EIN when registering your business to report taxes through the California Board of Equalization. If you have employees that you pay $100 or more per quarter, you must report and pay employment taxes on a periodic basis. You will be able to report and pay all employment related taxes by registering through the California Employment Development Department.

Next Steps

It is important to consider doing the following once you have created your partnership:

• Open a business bank account. Using your fictitious business name and EIN, you should set up a bank account to keep your business and personal finances separate.
• Obtain general liability insurance. Because partners of a partnership are personally liable for all debts and obligations of the business, a business liability insurance policy may be your only financial protection against unforeseen events. Having adequate business liability insurance can protect your business and personal assets in the event of a lawsuit or other claim against your business.
• Report and pay taxes. Depending on your specific business activities, you may be required to report such items as sales tax and use tax. You will need to register with California's Board of Equalization Business Registration.