I recently answered an Avvo question about whether one can sell a partnership interest. The question and answer are paraphrased below (with emphasis added).
Q. In California, is a general partnership terminated upon the sale of one partner’s interest to a third party? How would the remaining partner and new partner continue business? Would a new entity need to be formed? There is no written partnership agreement.
A. Corporations Code Section 16201 states that “A partnership is an entity distinct from its partners.” Therefore, a membership change does not, by itself, create a new partnership.
As a result, one can sell a partnership interest, and the partnership entity will continue to exist. There is no need to create a new partnership.
Corporations Code Section 16502 states that “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.” Therefore, the new partner is the successor to the old partner’s financial interest in the partnership.
Furthermore, the partnership 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.
Nevertheless, the questioner should consider the following:
- If the general partnership is retained, the partners should enter into a written partnership agreement to reduce the likelihood of misunderstandings or disagreements in the future.
- Even better, the partners should convert the partnership to a limited liability company (LLC) to avoid unlimited personal liability.
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
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