PARTNERSHIPS

Another way for one or more persons to acquire title to real property is in partnership.  There are a number of ways to achieve this.  First, the title deed can simply list the owners and state that they take as “tenants in partnership.”  Second, title can be taken in the name of the partnership.

A partnership is a legal entity which is distinct from its owners.  Thus, when property is taken in partnership it is owned, not by the partners, but by the partnership.   Technically, the partners own shares, not in the real estate, but in the partnership.

Partnership is a tricky and dangerous legal form.  It is tricky, because although partnerships can – and should – be created by a formal written agreement, they can also be created informally, with no written agreement.  The legal definition of a partnership is simply an association of two or more persons to conduct a business for a profit.  California Corporations Code Section 16202(a).  If people act like partners, they may be treated as partners in a later lawsuit, even if they have no formal agreement.

Partnerships are dangerous for several reasons.  First, they provide no protection against creditors.   Each partner is liable for the debts of the partnership.  Thus, if a business is conducted through a partnership, and the business goes bad, this can be a disaster for the individual partners.  Second, each partner has fiduciary duties toward the partnership and its partners.  Partnerships, in short, create many potential liabilities for their partners.

The above discussion concerns only general partnerships.  There is another type of partnership, a limited partnership.  In limited partnerships, there are two types of partners: general partners and limited partners.  Only general partners have personal liability for partnership debts; limited partners ordinarily do not have liability for partnership debts.  Limited partners, however, are not permitted to manage the business; the general partner holds management power.

In the 1970s, real estate was often held by limited partnerships, which then had significant tax advantages.  The tax law, however, was long ago amended to remove most of the advantages for limited partnerships.  As a result, limited partnerships are now rarely used to hold real estate.

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