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Legislature Considering Law that Would Clarify When a Limited Partnership’s Life Begins

When you are forming a business, you have many entities to choose from. One option is a limited partnership. These entities are governed in California by the California Uniform Limited Partnership Act of 2008 (CULPA). However, the law regarding limited partnerships may be about to change, so if you are considering forming one of these entities you should seek out business counseling.

What is a Limited Partnership?

When people think of partnerships they often think of business arrangements where two or more people share equal stakes in a company. A limited partnership is a different kind of partnership. While there will be one or more general partners, there are also one or more limited partners. This type of arrangement is very common amongst law firms, accounting firms, film production companies, and real estate investment projects.

The Existing Law Regarding Limited Partnerships is Unclear

The existing law regarding when a California limited partnership’s life begins is unclear. The CULPA itself provides inconsistent answers on the issue. One portion of the existing law says that, in order for a limited partnership to be formed, the following must happen:

  • a certificate of limited partnership has to be filed with and on a form provided by the Secretary of State’s Office; and
  • the partners must enter into a partnership agreement, which can happen before or after the certificate is filed.

Meanwhile, a different part of the statute says that a limited partnership is formed when the Secretary of State files the certificate of limited partnership. If a partnership agreement is entered before the filing, then there is no conflict. However, if the partners have not yet entered into a partnership agreement when the certificate is filed, a conflict exists and it is unclear as to whether the limited partnership has been formed or not. The situation is complicated further by the fact that the statute allows for delayed effective dates for filings. So it is unclear whether the limited partnership is formed on the date the certificate is actually filed or on the effective date.

The Legislature is Considering Changing the Law

The California legislature is considering a bill that would solve this apparent contradiction in the statute. The bill is called Assembly Bill 506. This bill would amend the portion of the statute that says that a limited partnership is formed when the Secretary of State files the certificate of limited partnership. The new version would say, in relevant part, “a limited partnership is formed when the Secretary of State files the certificate of limited partnership and the partners enter into a partnership agreement before or after the filing of a certificate of limited partnership.” The bill would also make this change subject to the portion of the statute that allows for delayed effective dates, seemingly solving both of the issues with the current version of the statute.