By law, a general partnership is when one individual and at least one other person agree to form a partnership and conduct business as a partnership. There are no filings with the Secretary of State; the partnership simply exists as its own entity by the will of the partners.
Partnerships are a recognized entity choice in Texas that are generally, the easiest to form. In fact, there are instances where even if you did not formally agree with another person to form a partnership, that partnership may be implied by law and legally exist even without an agreement between the partners. There is also a great deal of flexibility within a general partnership: partners can create all kinds of arrangements as to how profits and losses will be shared, interest transfers, and operations management. This kind of informality can be very costly though.
Forming a General Partnership:
To form a general partnership, there are a few key steps to follow:
- Choose a business name: Select a name for your partnership that complies with state naming requirements and is distinct from other businesses in your state.
- Draft a partnership agreement: While not necessarily required by statute in most states, it is highly recommended to have a comprehensive written partnership agreement that outlines the roles, responsibilities, profit/loss sharing, decision-making processes, and other critical aspects of the partnership.
- Register the partnership (if required): Texas requires the General Partnership be registered with the Secretary of State. This helps establish the legal existence of the partnership and will involve filing fees.
- Obtain necessary licenses and permits: Depending on your business activities and location, you may need to obtain various licenses and permits to operate legally. Common examples include business licenses, sales tax permits, professional licenses, and zoning permits.
- Open a business bank account: The Partnership will need to open a separate business bank account for the partnership to keep personal and business finances separate. Commingling of funds between personal and business accounts is a huge red flag.
- Obtain an Employer Identification Number (EIN): If you plan to hire employees or open a business bank account, you’ll need to obtain an EIN from the Internal Revenue Service (IRS). This serves as the partnership’s tax identification number. This number can be easily obtained in just a few minutes time in most circumstances.
- Register for state and local taxes: Texas Franchise Tax is required for all entities in Texas.
It’s important to consult with legal and financial professionals to ensure that you follow all necessary steps and comply with relevant laws and regulations when forming a general partnership in your state or locality.
General Partnerships Are A Liability Nightmare
Because there are very few corporate formalities required for partnerships, they become a popular choice for those individuals looking to hit the ground running with an idea or business venture. But, the lack of formality also lends itself to the risks of liability beyond what you thought you signed up for. In a General Partnership, each partner is jointly and severally liable for the debts of the other partners in the partnership. So, where two or more physicians may form a general partnership, the malpractice liabilities of one physician can be imparted on the other physicians in the group (this group of physicians may be more suited to a Professional Limited Liability Company). So, when you are thinking about forming a partnership, it may be worth it to thoroughly contemplate the risks that you are taking on versus the advantages of the flexibility and informality.
Frequently Asked Questions (FAQs) about General Partnerships:
If you are thinking about starting a General Partnership in Texas or want to learn more about entity choices, San Antonio Small Business Attorney Nathaniel Gilbert can help answer your questions and get you pointed in the right direction. For more on Business Organizations in Texas, Click Here. To get in touch with Nate directly, Click Here.
