The difference between a general partner and a limited partner in California partnership comes down to two primary questions: 1) What is your right to control the company?; and 2) What is your liability for the company’s debts and obligations?
The answer to the first question for a limited partner is that there is no right to control the ongoing operations of the business. You can give advice to the general partners, and you may be able to take your assets out of the company if you disagree with the company’s directions, but ultimately only the general partners can dictate how the company should be run.
The upside of this, however, is the answer to question 2. A general partner can be personally liable for the debts and obligations of the company – meaning creditors and plaintiffs can go after not just the company assets but also their personal assets – but a limited partner will only be liable up to his or her contributions to the company. In other words, another party cannot go after a limited partner’s personal assets.
That said, a court may or may not view you as truly a limited partner, and, even then, exceptions may apply.
Do You Have a Limited Partnership?
A general partnership can be formed in California without any corporate formalities, meaning the law can view you as a general partnership even if you never file any paperwork with the state.
Forming a limited partnership does require corporate formalities. You must file a certificate of limited partnership with the state, which has certain requirements for it to be valid, and your company’s name must have the words “limited partnership” or abbreviations “L.P.” or “LP.” The partnership must also create a limited partnership agreement.
Are You Indeed a Limited Partner?
Again, calling yourself a limited partner is not enough to make you a limited partner, and a court might instead look at how you actually conducted yourself with respect to the company before granting you the liability protections of a limited partner.
If a limited partner actually does participate in controlling the partnership, then a court could view that partner as a general partner (with the resulting personal liability), no matter what you are called in practice or in the documents. This does not mean a limited partner cannot do work on behalf of the partnership, such as acting as an employee or contractor, but when that veers into making controlling decisions on behalf of the partnership, personal liability could follow.
Were You Perceived as a General Partner By the Complaining Party?
Under California law, a key distinction in determining whether a presumptive limited partner is indeed personally liable as a general partner is the perception of a third party conducting business with that limited partner.
What this means is that, if a limited partner holds himself out as a general partner (whether expressly or through implication) to a third party, and that party later sues on an obligation, personal liability could potentially follow, given the specific facts of the transactions and conduct.
Work With an Experienced Los Angeles Partnership Dispute Attorney
At Wagenseller Law Firm in downtown Los Angeles, our attorneys have extensive experience in resolving all types of partnership litigation matters, including those related to fraud, contractual disputes, and alleged breaches of fiduciary duties. Contact Wagenseller Law Firm today to schedule a consultation to discuss your partnership dispute.