Partnership Liability to Third Parties

If you are considering forming a California partnership, one of the questions you might be asking yourself is, “Who in a partnership is liable to third parties?” For example, who is liable if a partnership incurs debts or a business partner claims breach of contract? If a customer files a personal injury lawsuit against a partnership, who is financially liable to pay the damages in a settlement or court verdict? Well, the question, “Who in a partnership is liable to third parties?” does not have a simple or straightforward answer. This is because who is liable depends on the type of partnership. Different rules apply to each type of partnership.

General Partnerships

A California general partnership has two or more people who agree to do business for profit. The general partners in a general partnership share the ability to control and manage the business. General partners share responsibilities, profits, and assets. They also share financial and legal liabilities. Unless a third party agrees, all partners in a general partnership are liable jointly and severally to third parties. This means that in a general partnership, third parties can take legal action against all partners, or just one of the partners, for any obligation, debt, or claim. It means that if an issue arises, all partners can be held personally liable for acts carried out by the other, even if a partner was unaware of the other partner’s actions.

Because partners in a general partnership are personally liable to third parties, their personal assets can be reached.

Limited Partnerships

A California limited partnership has at least one general partner and one limited partner. Unlike a general partner, a limited partner does not actively manage the partnership. When it comes to liability, a limited partner’s liability is usually limited to their amount of control or participation. On the other hand, a general partner has unlimited personal liability. If, for example, a limited partnership goes bankrupt and a limited partner had invested $20,000 in the partnership, the limited partner would lose the entire $20,000, but their personal assets would be safe. As you can see from this, there is an advantage that comes with being a limited partner.

Limited Liability Partnerships (LLPs)

An LLP is not for everyone. Among those who can form a California LLP are those practicing law, engaging in the practice of public accountancy, or engaging in the practice of engineering or the practice of land surveying. In an LLP, the partners are not personally liable to third parties. Instead, the LLP is liable to third parties.

However, certain requirements must be met to receive the liability benefits of a California LLP. Firstly, the LLP must maintain certain levels of insurance as required by law. Secondly, the LLP must maintain a specific net worth. Thirdly, the LLP must acquire guarantees from partners. And lastly, the LLP must maintain an escrow account or similar type of account as security for liabilities.

As much as the information in this article is helpful, it is best to talk to a qualified business attorney about liability among partners in a California partnership.

Contact a Business Attorney Serving Santa Clara and Silicon Valley

If you need help understanding liability among partners in a California partnership, contact the experienced business attorneys at SAC Attorneys LLP.