The General Partnership Is Not Dead. It Just Isn’t for Everyone

By: Eric A. Gravink, Esq.

Every few years someone tells me the general partnership is obsolete. Why would anyone form an entity where every owner is personally on the hook for the debts and obligations of the business when an LLC gives you the same tax treatment with a liability shield built in? In California that argument is even easier to make, because the state charges LLCs and corporations an $800 minimum franchise tax every year whether the entity makes money or not. There is no such fee with a general partnership. So the pushback is fair. But it misses why general partnerships still get formed here, and why in my practice, I still see them used correctly by people who know what they are doing.

I have written before about why entity selection usually comes down to tax and economics rather than liability protection alone, and separately about why forming an LLC is the easy part while getting the operating agreement right is not. This piece sits next to those two. The general partnership is the entity most people skip over entirely when they have that conversation, and in narrow situations that is a mistake.

Let me start with the basics, because most people outside the legal world do not think about this until they are already in one.

A general partnership in California is what you get by default when two or more people go into business together and do not form anything else. General partnerships are governed by the California Revised Uniform Partnership Act, found in the Corporations Code. You do not have to file anything with the Secretary of State to create one. You can optionally file a Statement of Partnership Authority, but it is not required. You do not need a written partnership agreement, though you should have one. If two people agree to split the profits and losses of a venture and start operating in California, the law will treat that as a general partnership whether they meant to form one or not. That is the trap. People end up in general partnerships by accident all the time, and they find out the hard way when a creditor comes looking for payment and every partner’s personal assets are exposed.

That unlimited liability is the defining feature of a general partnership. Each partner is personally responsible for the debts and obligations of the business, and under California law each partner can generally bind the partnership to a contract without the other partners’ consent. If your partner signs a bad lease or takes out a loan the business cannot repay, you are on the hook too, even if you never agreed to it. This is the reason most lawyers, myself included, steer clients toward an LLC as the default choice. An LLC gives you the same pass-through tax treatment as a partnership, but it puts a wall between the business debts and your personal assets.

This is not just a formation trap. It shows up constantly with tenancy in common arrangements in real estate. Co-owners often use a TIC structure specifically to avoid forming an entity, sometimes to preserve 1031 exchange treatment, sometimes just to avoid the LLC filing and the annual franchise tax. Simply owning property together and splitting rental income does not by itself create a partnership under California law. But once those co-owners start actively managing the property jointly and splitting net profits like a business rather than passive co-owners, a court can find they have formed a general partnership whether they intended to or not. For individual TIC owners, that is the exact unlimited liability exposure described above, layered on top of a structure everyone thought was avoiding entity risk altogether. I see this most often when a TIC group started as a passive investment and slowly drifted into active co-management as the property required more attention.

So why does the general partnership still have a place in California?

The first reason is that general partnerships require nothing to form. No filing, no filing fee, no waiting on the Secretary of State to process paperwork. If two parties want to move fast on a short-term deal, a general partnership can be up and running the moment they agree to it. In real estate, I see this most often with quick joint ventures between sophisticated parties who are each already operating through their own LLC.

But the bigger driver in California is the franchise tax. Every LLC and every corporation doing business in California, including an S-corporation, owes the Franchise Tax Board the same $800 minimum franchise tax each year, regardless of whether the entity turns a profit. LLCs classified as partnerships for tax purposes may also owe an additional LLC fee on top of that if total income crosses certain thresholds. A general partnership owes none of this. It is not subject to the $800 minimum tax at all. For a short-term joint venture, that is real money, and it is the single biggest reason I see sophisticated real estate parties choose a general partnership over forming a new LLC for a deal that might close and wind down within a year.

Here is the pattern. Two real estate investment companies, each already organized as a California LLC, want to team up on a single deal. Maybe it is a value-add multifamily acquisition, or a short-term fix and flip project. Instead of forming a new LLC to hold the joint venture, which means filing Articles of Organization, paying the initial fee, registering for the annual $800 franchise tax, and drafting an operating agreement, the two companies simply enter into a general partnership agreement between themselves. The general partnership is the joint venture vehicle, but the partners in that partnership are LLCs, not individuals. Each partner’s actual liability exposure is limited to the assets it puts into the venture, because the partner itself is a liability shielded entity. The general partnership format lets them avoid the cost, the delay, and the ongoing $800 annual tax of standing up a brand-new LLC just to hold one deal.

This is a legitimate and common use of the general partnership structure in California, and it works well when the parties are sophisticated and the partnership agreement is drafted carefully. The unlimited liability concern is real, but it is being managed at a different level, because the exposed party is the LLC partner, not an individual person. I have written before about how template LLC operating agreements tend to fail once deadlock, disproportionate contributions, or exit disputes show up. A template general partnership agreement fails for the exact same reasons, and arguably faster, since there is no liability shield underneath to fall back on if the relationship breaks down.

On the federal side, general partnerships and LLCs taxed as partnerships are treated almost identically. Both are pass-through entities for federal income tax purposes. California generally conforms to this federal treatment. The partnership itself does not pay California income tax on its net income, and income, gain, loss, deduction, and credit pass through to the partners and get reported on their own returns. Where California diverges is at the entity-level fee, not the income tax treatment. As I mentioned, LLCs and corporations owe the $800 minimum franchise tax to the Franchise Tax Board every year, and LLCs taxed as partnerships can also owe an additional fee tied to gross receipts once revenue climbs. A general partnership owes neither.

I have written elsewhere about how Subchapter K gives partnerships and partnership taxed LLCs the ability to make special allocations that an S-corporation cannot match, and how that flexibility plays out in real estate deals through preferred returns and disproportionate depreciation allocations. That same flexibility exists in a general partnership. It is not a reason to choose a general partnership over an LLC on its own, since both get it, but it is a reason neither should be confused with an S-corporation, which is limited to one class of stock and must allocate strictly by ownership percentage. S-corporations also cannot have more than 100 shareholders, and every shareholder must be a US citizen or resident individual, certain trusts, or certain estates. No corporate or partnership shareholders are allowed, with narrow exceptions. Real estate deals routinely involve LLCs and other partnerships as investors, which alone rules out the S-corporation for most joint ventures I work on. And in California, an S-corporation still owes that same 1.5 percent franchise tax on its net income, with an $800 minimum, so it does not avoid the entity-level cost that makes the general partnership attractive in the first place.

The self-employment tax tradeoff I have discussed before in the S-corporation context applies the same way here. A general partner’s distributive share of income is generally subject to self-employment tax, and a general partnership offers no way to split compensation between wages and distributions the way an S-corporation does. In real estate this is usually a smaller concern than it sounds, because rental income from real property is generally excluded from self-employment tax to begin with, whether it runs through a general partnership, an LLC, or an S-corporation.

One structure worth distinguishing here is the limited partnership with an LLC serving as general partner, which is common in larger California real estate syndications and which I have touched on separately. That structure uses a general partnership concept, an LLC acting as the GP, to centralize control while capping franchise tax exposure across a deal with many passive investors. It is a different tool solving a different problem. What I am describing in this piece is a plain general partnership functioning as the entire joint venture vehicle between two or more active parties, not a GP or LP layered structure built around passive investors.

One more California specific issue deserves mention for real estate. Transferring California real property into or out of any entity, general partnership included, can trigger a change in ownership for property tax reassessment purposes under Proposition 19 and the related rules on legal entity ownership changes. This is not unique to general partnerships. It applies to LLCs and corporations too. But because a general partnership is so easy to form and reform on the fly, clients sometimes move property around inside one without thinking about the reassessment consequences. Any time real property is going into or coming out of a partnership, or partnership interests are changing hands in a way that shifts control, that needs to be checked before it happens, not after the county assessor sends a new bill.

Putting this together, I see three situations where a general partnership still makes sense in my California practice.

The first is the quick joint venture between two already shielded entities that I described above, where the partnership is a contractual layer on top of existing LLCs rather than the primary liability shield, and where avoiding a second $800 annual franchise tax matters.

The second is a professional or informal arrangement where the parties know each other well, trust each other completely, and want to avoid any formation cost, delay, or ongoing franchise tax for a short term or low risk project. This is rare in real estate given the dollar amounts involved, but it happens on smaller deals or preliminary arrangements before a more formal entity gets formed.

The third is when a general partnership already exists by accident, and the right move is not to dissolve it but to formalize it with a written partnership agreement while the parties evaluate whether to convert to an LLC. Sometimes the fastest way to reduce risk in an accidental partnership is to paper the relationship properly first, then convert.

What I do not recommend is using a general partnership as the primary structure for individuals investing directly in California real estate without another liability shielded layer. If you are an individual investor putting real property into a general partnership with other individuals, you are exposing your personal assets to every liability of that partnership, from a slip and fall on the property to a contractor’s unpaid invoice. There is no good reason to accept that risk when an LLC gives you the same tax outcome with a liability shield, and the $800 annual cost is a small price for that protection once a deal is meant to last.

The general partnership is not a relic in California. It is a tool with a narrow but real purpose, and the people who use it well understand exactly why they are choosing it, including the franchise tax and reassessment consequences, and what they are giving up. The mistake is not using a general partnership. The mistake is ending up in one without realizing it, or using one where a shielded entity was clearly the better call. If you are structuring a joint venture, converting a handshake deal into something formal, or trying to figure out whether your existing arrangement exposes you more than you realize, that is exactly the kind of question worth getting in front of California counsel before the deal closes, not after something goes wrong.