California Partnership Agreement: CRUPA, LLP Registration, FTB Tax

The California Entity Choice

California permits four partnership-type entities:

For most California businesses, the practical answer is an LLC (not on this table), which gives all members limited liability and pass-through taxation. The LLC also pays the $800 annual minimum tax plus a tiered gross-receipts fee that can reach $11,790 for businesses with over $5M in California revenue. For professional services firms required to use a partnership form (law, accounting, architecture), the LLP is the right answer.

The California-Specific Drafting Points

1. Non-compete void in most contexts

A California partnership agreement cannot include an enforceable post-departure non-compete unless the restriction is tied to the sale of a partner’s interest under Bus. & Prof. Code §16601. Standard partnership templates from non-California sources almost always include broader non-compete language that is void in California. The agreement should either omit the post-departure non-compete entirely or scope it specifically to the §16601 sale-of-interest exception.

Non-solicitation of customers (to the limited extent necessary to protect trade secrets) and non-solicitation of employees are generally enforceable. The agreement should rely on non-solicitation rather than non-compete for ongoing operational protection. Confidentiality and trade-secret provisions remain fully enforceable and are the primary mechanism for protecting the partnership’s information assets.

2. Fiduciary-duty waivers limited

Cal. Corp. Code §16103 permits the partnership agreement to modify or limit certain aspects of the duty of loyalty and the duty of care, but the modifications must not be “manifestly unreasonable.” The statute specifically prohibits eliminating the duty of loyalty altogether or eliminating the obligation of good faith and fair dealing. Unlike Delaware (which permits broad waivers in partnership agreements under DRULPA §17-1101), California courts may scrutinise broad fiduciary-duty waivers and refuse to enforce them.

Practical implication: standard California partnership agreements should specifically identify the types of conduct that are pre-authorised (e.g. customary related-party transactions on arm’s-length terms, taking advantage of unrelated business opportunities) rather than including a sweeping waiver of fiduciary duties. The narrower drafting is more likely to be enforced.

3. Annual minimum franchise tax planning

LPs and LLPs in California (but not GPs) owe the $800 annual minimum franchise tax under Cal. Rev. & Tax. Code §17935 and §17948.2 respectively. The 2020 AB 85 amendment exempts these entities from the minimum tax for their first taxable year if formed on or after 1 January 2021 and before 1 January 2024 (the exemption has been extended at various times; verify current status with the FTB).

For partnerships in their second year and beyond, the $800 is owed regardless of income. Form 565 (or Form 568 for LLCs) reports the tax. The minimum tax is in addition to any income flowing through to the partners; the partners owe California personal income tax on their distributive shares as well.

The agreement should specifically authorise the partnership to make timely tax filings and to retain or distribute funds sufficient to cover the minimum tax. Defaulting on the minimum tax can result in suspension of the partnership’s ability to do business in California.

The LLP Registration Process (Professional Services Only)

California LLPs are available only for partnerships that practise law, public accountancy, architecture, engineering, or land surveying. Other professional services and general business partnerships cannot form California LLPs (this is unusual; most states permit any partnership to register as an LLP).

The registration process for a California LLP:

• File Form LLP-1, Application to Register Limited Liability Partnership, with the Secretary of State;
• Filing fee: $70 (verify current fee);
• Maintain professional liability insurance: minimum $100,000 per claim for law firms; $1M aggregate for accounting firms; varies for other professions (per Cal. Corp. Code §16956);
• Pay the annual $800 minimum franchise tax via Form 565;
• File annual Statement of Information (Form LLP-12) every two years; $25 filing fee.

Once registered, partners in the LLP are not personally liable for the negligence or malpractice of other partners or partnership employees (Cal. Corp. Code §16306). Each partner remains personally liable for their own malpractice and for ordinary contractual obligations they personally incur.

Sample California-Specific Partnership Provisions

Local Taxes Worth Knowing About

California partnerships with operations in major cities face local business taxes that meaningfully affect modelling:

• San Francisco Gross Receipts Tax. Up to ~1% of San Francisco-source gross receipts (rates vary by business activity). Combined with the Homelessness Gross Receipts Tax and the Overpaid Executive Tax, the total can exceed 1.5% for some businesses. Imposed quarterly with annual reconciliation on the Business Personal Property Statement.
• Los Angeles Business License Tax. Up to ~0.5% of LA-source gross receipts, varying by business classification. Annual filing.
• San Jose Business Tax. Tiered annual fees based on employee count and revenue.
• Property tax. If the partnership owns real estate, Prop. 13 limits annual increases but reassessment triggers on change of control (which can include partnership interest transfers exceeding 50% over time).

Multi-city operations require multi-city compliance. The agreement should authorise the managing partner to register the partnership for local taxes in each city where the partnership does business and to pay the resulting taxes from partnership funds.

Authoritative Sources

• Cal. Corp. Code §§16100-16962 (California Revised Uniform Partnership Act). California Legislative Information.
• Cal. Corp. Code §§15900-15912.07 (California Revised Uniform Limited Partnership Act).
• Cal. Corp. Code §§16951-16962 (California LLP statutes).
• Cal. Bus. & Prof. Code §§16600-16602.5 (non-compete prohibitions and exceptions).
• Cal. Rev. & Tax. Code §17935 and §17948.2 (LP and LLP annual tax).
• California Franchise Tax Board, Form 565 instructions. FTB.
• City and County of San Francisco Business and Tax Regulations Code Art. 12-A-1.
• California Secretary of State Business Programs Division. CA SOS.

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