Many business disputes as well as personal injury lawsuits involve business partnerships. When a plaintiff – whether it be a spurned business partner claiming breach of contract, a customer who broke her leg while on partnership property, or anything in between – successfully brings suit against the partnership, the question will arise as to what parties are going to be financially liable to pay the plaintiff’s damages in a settlement or judgment following a verdict. This question largely will be answered based on what type of partnership was formed.
A general partnership can be any ongoing business venture carried on by two or more people where profits are shared. There is no registration requirement for a general partnership, and so two people engaged in an ongoing business venture may be considered a general partnership in the eyes of the law even if they never considered or called themselves partners.
This can become hugely significant for the partners – and anyone with whom they deal – when a tort or contract liability comes up. In such situations, all partners can become personally liable for acts carried out by the other in furtherance of the partnership, even if one partner was not aware of the other partner’s acts (and, again, even if they did not think of themselves as a partnership at all). Because the partners in a general partnership are personally liable on partnership debts, this means that their personal assets (such as homes, vehicles, and savings) can be reached, not just assets in the partnership itself.
In a limited partnership, there is at least one general partner and one limited partner. A limited partner is one that does not take an active role in managing the partnership, but whose contributions are more investment-related. The benefit of being a limited partner is that a limited partner’s liability only extends to the assets invested in the partnership and will not include the limited partner’s personal assets.
Thus, if a limited partner invested $10,000 in the partnership, he or she might lose all that money if the partnership goes bankrupt due to a legal obligation, but that limited partners’ personal assets will be safe. General partners in a limited partnership remain personally liable for the partnership’s obligations, however. Certain registration formalities must be met in California to create a limited partnership.
Limited Liability Partnerships
Limited liability partnerships (LLPs) are often confused with limited partnerships, but they are quite distinct under California law. In a limited liability partnership, the partners are not personally liable for the obligations for the partnership, whether those liabilities might arise out of a contractual relationship (e.g. an employee or supplier) or are based on tort liability. Instead, only the LLP itself will be liable for the obligation in a lawsuit.
To obtain the liability benefits of an LLP in California, the partnership must meet the registration requirements for an LLP and it must also meet ongoing state requirements which are there to ensure that plaintiffs will have recourse against the partnership if injured. These requirements include: 1) obtaining insurance; 2) maintaining an escrow account or similar type of account as security for liabilities; 3) obtaining guarantees from partners; or 4) maintaining a specified net worth.
Talk to a business litigation attorney for further information about liability among partners in the context of an LLP or other partnership in California.
Contact the Partnership Dispute Attorneys at Wagenseller Law Firm
At Wagenseller Law Firm in downtown Los Angeles, we provide full legal services to individuals and businesses in business and real estate litigation matters. Contact the Wagenseller Law Firm today to schedule a consultation to discuss your partnership dispute matter.