In California, is a 50/50 general partnership terminated upon the sale of one partner's entire 50% interest to a third party?
PS. There was no initial partnership agreement.
3 attorney answers
I am going to agree in part, and disagree in part, with my colleagues - and, along the way, provide direct answers to your questions. (Corporations Code Sections are available at the first two links provided below.)
"A partnership is an entity distinct from its partners." (Section 16201) Therefore, as stated at page 250 of CEB's Selecting and Forming Business Entities, "membership changes do not by themselves create a new partnership." I.e., a new entity need not be formed.
"The only transferable interest of a partner in the partnership is the partner's share of the profits and losses of the partnership and the partner's right to receive distributions." (Section 16502) Therefore, the new partner is the successor to the old partner's financial interest in the partnership. The partnership, itself, continues its business operations. Of course, to the extent that the former partner had a role in the business, arrangements must be made to fill that role.
You should consider:
- If you keep the general partnership, entering into a written partnership agreement.
- Even better, convert the partnership to an LLC to avoid unlimited personal liability. (Please see the post at the last link below.)
This information does not constitute legal advice and does not establish an attorney-client relationship.
Because you don't have a written partnership agreement which may have otherwise set forth what would happen upon the sale of one partner's interest, it is difficult to answer this question. It seems that you consented to the sale and may not have any objections to the new partner. You should discuss with your new partner how both of you want to move forward and then determine your respective roles in the business. Once you have a general idea, consult an attorney and then determine how best to structure the business; whether as a partnership or whether a new "entity" should be formed.
So, apparently you are a general partnership as a matter of law, not contract. There is no "entity" that was formed. Sale of an interest does not terminate the general partnership. Since there was no "entity" created before, only one imposed as a matter of law, there is no new entity to be formed now.
This seems to be a risky way to do business for many reasons.
The above is general legal and business analysis. It is not "legal advice" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also avvo.com terms and conditions item 9, incorporated as if it was reprinted here.
If you filed a GP-1 for your partnership, you need to review the following link. It is not necessary to file the GP-1, but if you did ... http://business.ca.gov/StartaBusiness/DefiningaBusiness/GeneralPartnership.aspx
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Michael Charles Doland
Great answer which give much better clarification than my prior response.