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California Limited Partnership

by Stan Burman

A California Limited Partnership is the topic of this blog post.

A California Limited Partnership can be an excellent method of asset protection. A California Limited Partnership (LP) consists of at least one general partner and a limited partner.

Advantages of a California Limited Partnership.

In a California Limited Partnership the general partner has no asset protection. However the limited partner does have a limit on the loss of their assets.

The liability of the limited partner in an LP is limited to the original investment that the limited partner made in a company. This can prevent creditors from going after the entire assets of a company, because they usually exceed the limited partner’s original investment. However the limited partner can lose any asset protection if they take over control of the business.

If an asset, such as real property is placed in a limited partnership, a creditor cannot force the sale of the real property to satisfy a judgment. They can only sue for the amount that they contend is owed. The fact that a creditor cannot just seize property of the limited partnership is a very strong form of asset protection.

The asset protection area is a growing concern of many people as California is well known as a very litigious state.

Clearly for certain individuals, especially those with substantial business and/or personal assets, asset protection should be looked upon as insurance.

Asset protection generally involves the use of one or more different entities which can protect valuable assets from creditors and judgments. Proper use of an LP is a very effective technique. The entity is set up as a limited partnership with special provisions to provide the asset protection features. In some cases a corporation can be designated as a general partner.

In using an LP all personal and business assets are typically placed into the partnership. Real property, bank or brokerage accounts, and other real estate investments would be transferred into the partnership. Multiple partnerships can also be set up to hold substantial and diverse investments.

These techniques are very effective, because in the event of a lawsuit or a judgment, creditors will generally not be able to reach inside the partnership and seize any of these assets. Under California law, and the law of most other states as well, a creditor has no right to execute or levy on partnership assets with a judgment against one of the partners. This law applies to Limited Liability Companies as well and is contained in the California Corporations Code.

The California Supreme Court has ruled that, under the proper circumstances, the ONLY remedy that a creditor can use is what is known as a "charging order". See Evans v. Galardi (1976) 16 Cal.3d 300, 310.

If any cash is distributed to a person by the LP, the creditor can take that cash to satisfy the judgment. If no distributions are made to that person, the creditor will receive nothing.

The partnership can sell assets and retain or reinvest the proceeds, however if no money comes out to that person there is nothing for the creditor to take.

A creditor cannot take a person’s interest in management and control of the partnership and cannot take any of the assets in the partnership. Also the creditor may be subject to tax on any income allocated on the partnerships tax returns. This fact alone can serve as effective "shark repellent."

If it is properly structured, the LP can provide an entity to protect assets from the claims of creditors.

Assuming that the transfer of the assets to the LP was not a fraudulent conveyance under State law, the ability of a creditor of a partner or member to reach the assets of the LP is extremely limited due to several facts such as:

(i) The creditor can only become an assignee of the Partner's interest.

(ii) The creditor would not be entitled to exercise any of the rights or powers of a partner.

(iii) The only result of the assignment would be to entitle the assignee to receive the distributions and allocations of profits and losses to which the assignor would be entitled.

(iv) This places the creditor in a relatively poor bargaining position when negotiating with the LP and may make it possible to repurchase the interest from the creditor at a steeply discounted price.

(v) The partnership agreement can provide that the LP (or its partners) have the option to purchase the interest of a partner in the event the interest is seized by or otherwise transferred to a creditor utilizing extended payment terms, in some cases 15 years or more (see the sample LP below), in the event the option is exercised.

With so many people concerned about frivolous lawsuits the use of a Limited Partnership in California is a choice that growing numbers of people are using.

Sample 56 page Agreement for California Limited Partnership for sale.

Attorneys or parties in California who would like to view a portion of a sample 56 page California Limited Partnership Agreement sold by the author which contains the purchase option mentioned above can see below.

Sample California Limited Partnership Agreement by Stan Burman on Scribd

 

 

Virtual paralegal with over 20 years of experience available for hire.

The author of this blog post, Stan Burman, is a freelance paralegal who has worked in California and Federal litigation since 1995 and has created over 300 sample legal documents for sale.

For licensed attorneys and law firms that need assistance with any California or Federal litigation matters, Mr. Burman is available on a freelance basis. Mr. Burman may be contacted by e-mail at DivParalgl@yahoo.com for more information. He accepts payments through PayPal which means that you can pay using most credit or debit cards.

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DISCLAIMER:

Please note that the author of this blog post, Stan Burman is NOT an attorney and as such is unable to provide any specific legal advice. The author is NOT engaged in providing any legal, financial, or other professional services, and any information contained in this blog post is NOT intended to constitute legal advice.

The materials and information contained in this blog post have been prepared by Stan Burman for informational purposes only and are not legal advice. Transmission of the information contained in this blog post is not intended to create, and receipt does not constitute, any business relationship between the author and any readers. Readers should not act upon this information without seeking professional counsel.

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