Partnerships are one of the most commonly formed business entities. A limited partnership (LP) allows a business to have both general and limited partners. A general partner takes an active role in the business’ management. A limited partner is comparable to a “silent investor”—he or she invests in the partnership, but does not actively participate in the business’ operation.
The process of forming a limited partnership varies from state to state. In Texas, the Business Organizations Code governs the creation and management of LPs. The Secretary of State is responsible for the registration of limited partnerships.
In Texas, a limited partnership must have at least one general partner and one limited partner. If your partnership operates under an assumed name (something other than the partners’ surnames), you must register the business’ name with the state. Additionally, you must designate your business’ limited partnership status by putting “L.P.” after its name.
Finally, you must designate a registered agent for your LP. (In Texas, a limited partnership cannot be its own registered agent.) A registered agent is someone who is authorized to accept important documents (like paperwork initiating a lawsuit) for your business. Your registered agent must be physically present in Texas. If you need help selecting a registered agent, a business lawyer can help you with the process.
To create a limited partnership, you must file a Certificate of Formation (Form 207) with the Secretary of State. This form can be submitted either online or by mail. You must provide the following information on your Certificate of Formation:
- The name of your partnership,
- The name and address of your registered agent,
- The name and address of at least one general partner,
- The business’ principal address,
- The limited partnership’s effective date,
- Any other provisions the general partners want to set out, and
- The signatures of the general partners.
You may have to file additional paperwork if you plan on operating your business under an assumed name.
In Texas, limited partnerships must have a partnership agreement. A partnership agreement defines the rights and responsibilities of both general and limited partners. For example, a partnership agreement may set out the procedures for profit distribution, dispute resolution, and terminating the partnership. While a Texas partnership agreement may be written or oral, a written agreement is probably in your best interest.
Limited partnerships have specific benefits. First, an LP does not have to pay income taxes. Instead, its income passes through to its partners (who must report this income to the IRS and pay taxes). Limited partnerships may still have to pay other state taxes, such as franchise taxes.
And, if you are a limited partner, you may not be personally liable for the business’ debts and other financial obligations. As long as a limited partner does not take an active role in the partnership’s management, your personal assets cannot be collected to satisfy the LP’s debts.
General partners, however, are personally liable for the business’ debts and other obligations (such as legal judgments). This means that a general partner’s personal assets can be seized to collect a debt or judgment against the LP. If you form a limited partnership, general partners should consider purchasing liability insurance to help offset this risk.
Alternatively, you can consider creating a limited liability partnership (LLP). In an LLP, all partners have limited liability protections. However, different rules and procedures apply to LLPs in Texas. A business lawyer can help you decide which business structure is best for you.
While completing a form is a simple process, a lot more goes into the structuring of a limited partnership. For example, you should create a legally binding partnership agreement, evaluate liability insurance policies, and may have ongoing reporting and other legal obligations. A business attorney can help you follow the correct procedures and protect your limited partnership.