A partnership is a common structure in which a business functions. It is an association of two or more individuals who carry on as co-workers in a business for profit.
Partnerships are formed when individuals in a business have the ability to share in the profits as well as a right to control the business. Those parties will then be considered partners.
There are three different types of partnerships, including:
- General partnerships;
- Limited liability partnerships (LLPs); and
- Limited partnerships (LPs).
The type of partnership that is formed by the partners will determine the amount of liability each partner has as part of the partnership.
What is an LP?
A partnership is one of the most common types of business entity. In a limited partnership (LP), the business has both general and limited partners.
A limited partner can be compared to a silent investor. This partner invests in the business but does not actively participate in its operation.
The requirements for forming an LP vary from state to state. In Texas, the creation and management of LPs is governed by the Business Organizations Code. The Texas Secretary of State handles the registration of limited partnerships.
A limited partnership allows its limited partners to have certain legal rights and protections. These act as protection from individual liability claims for issues such as:
- Losses; and
- Violations directly related to the LP.
This is in contrast to a general partnership, in which each partner is jointly and severally liable for losses incurred by the partnership. This may put some partners at a disadvantage in this type of partnership, especially those that only play a minor role or have made smaller investments than other partners.
A limited partnership is required to have at least one general partner to be properly formed. This general partner is responsible for making management decisions and for the partnership’s day-to-day operations.
Limited partners, on the other hand, have only limited powers over the partnership. They can only be held liable up to the amount of their investment in the LP. Limited partners are mainly responsible for investment duties in the LP.
What are the Requirements for a Limited Partnership in Texas?
In Texas, a limited partnership is required to have at least one general partner and at least one limited partner. If the partnership operates under an assumed name, or something other than the partners’ surnames, the LP must be registered with the State of Texas. In addition, the name must designate the business’ limited partnership status by having “L.P.” after the name.
A limited partnership in Texas must designate a registered agent. In Texas, the limited partnership cannot be its own registered agent.
A registered agent is an individual who is authorized to accept important documents, such as paperwork initiating a lawsuit, for a business. The registered agent must be physically present in Texas. If an LP needs assistance selecting a registered agent, a business lawyer can assist with the process.
What Paperwork Do I Need to Form a Limited Partnership?
To form a limited partnership in Texas, the business must file a Certificate of Formation (Form 207) with the Texas Secretary of State. This form may be submitted by mail or online. There may be additional paperwork if the limited partnership will be operating under an assumed name.
The following information must be included on the Certificate of Formation:
- The name of the partnership,
- The name and address of the registered agent,
- The name and address of at least one of the general partners,
- The business’ principal address,
- The limited partnership’s effective date,
- Any other provisions the general partners want to include, and
- The signatures of the general partners.
In Texas, a limited partnership must have a partnership agreement. A partnership agreement outlines the rights and responsibilities of general and limited partners.
In Texas, a partnership agreement may be written or oral. It is always best, however, to have the agreement in writing so it can be referred to in the event of a dispute.
A partnership agreement may include provisions regarding procedures for:
What is a Partnership Agreement?
A partnership agreement is a legal document that outlines the terms and conditions as well as rights and responsibilities for the individuals involved in the business to conduct themselves as partners. It outlines the duties and responsibilities of each type of partner and defines the scope of activity for the partnership.
Essentially, the partnership agreement is a contract that provides legal enforcement for the terms of business operations. As noted above, it is important to have this agreement in writing.
The partnership agreement may be referred to in the event of a dispute or legal contention regarding the activities of the partners and of the partnership. In the event of a lawsuit, a court may examine the agreement to determine the proper outcome of an issue based on the partners’ agreement.
What Benefits Does Texas Give to a Limited Partnership?
In Texas, a limited partnership receives specific benefits. First and foremost, the limited partnership is not required to pay income taxes.
Instead of paying income taxes, the income of the LP passes through to the partners who must report the income to the Internal Revenue Service (IRS) on their taxes. Limited partnerships may still be required to pay other forms of state taxes, including franchise taxes.
Limited partners receive the benefit of not being personally liable for the debts of the business or other financial obligations. So long as the limited partner does not take an active role in the partnership’s management, their personal assets cannot be seized to satisfy the debts of the limited partnership.
What Disadvantages Does Texas Give to a Limited Partnership?
There are some disadvantages for a limited partnership in Texas. Unlike the limited partners, the general partner is personally liable for the business’ debts and other obligations, including legal judgments.
This means that the personal assets of the general partner may be seized to collect on a debt or a judgment against the limited partnership. If an individual forms a limited partnership, the general partners should consider purchasing liability insurance to help offset the risk of personal liability.
In the alternative, the partners may consider creating a limited liability partnership (LLP) instead of a limited partnership. In a limited liability partnership, all of the partners are afforded limited liability protections.
However, there are different rules and requirements for LLPs in Texas. If partners are unsure which structure best suits their needs, they should consult with a business lawyer to determine the best structure.
Should I Hire a Business Lawyer?
It is important to get help from an experienced Texas corporate attorney when forming a limited partnership, or any other type of partnership in Texas. While the process may appear to simply require filling out a form, there are a lot more issues involved.
A lawyer can help ensure all requirements for a limited partnership are met. A lawyer can also help you create a partnership agreement. Your lawyer can advise you regarding liability insurance. Having a lawyer help you set up your limited partnership is the first step to success for your new business.