The first benefit is simplicity. If you and at least one other person are attempting to get a venture off the ground, a partnership may be your quickest way to do so. In fact, partnerships can be formed without the partners ever actually doing so, such as in a “de facto” partnership where the intentions of the partners are enough to make the existence of a partnership a reality. There is no requirement that a formal Partnership Agreement exist, and there is no State of Texas filing requirement with the Secretary of State. Shake hands, exchange an email or two, and you can be going. Now, the advice of your attorney will always be to memorialize all business dealings in writing through a custom drafted Partnership Agreement, but this is just an example of how quickly a partnership can actually be created.
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Secondly, taxes for a partnership are “pass through” meaning that taxes are only paid one time: on the personal income return of each partner. The partnership itself does not pay taxes, as opposed to a corporation where taxes are paid both at the corporate level, as well as the individual level on any distributions or dividends. If you and two business colleagues form “San Antonio Business Consulting Partnership” and the business generates $300,000 in the first year of business, that income is only taxed to each of the three partners—Each partner pays tax on $100,000.00 on their own personal return. The partnership itself does not file a tax return for the purpose of paying taxes, but MUST file an information return to report the income.
The third main benefit is that management is conducted equally by all partners. Whereas in a corporation or LLC, management may be reserved to select classes of owners or members, the partners in a partnership share equal management responsibility of the partnership. Partnerships can be attractive for professional practices where all the professionals in the partnership would share equal responsibility for making managerial decisions instead of deferring to one or two managers.
Tips on Choosing the Right Partner(s) and Developing a Strong Partnership Agreement
- Partner Selection:
- Evaluate potential partners based on their skills, experience, resources, and compatibility with your business goals and values.
- Consider factors such as work ethics, communication styles, risk tolerance, and long-term commitment.
- Conduct thorough background checks and reference checks to ensure you are making an informed decision.
- Partnership Agreement:
- Develop a comprehensive partnership agreement that clearly outlines the roles, responsibilities, decision-making processes, and profit/loss distribution for each partner.
- Clearly define the contributions (financial, intellectual property, etc.) of each partner and their respective ownership percentages.
- Establish procedures for dispute resolution, partner buyouts, and dissolution of the partnership.
- Consult with a qualified attorney to ensure the agreement complies with Texas laws and protects the interests of all parties involved.
- Communication and Transparency:
- Foster open and transparent communication among partners from the outset.
- Establish regular meetings to discuss business operations, strategies, and any concerns or conflicts that may arise.
- Maintain accurate and accessible financial records and ensure all partners have equal access to these records.
- Exit Strategies:
- Include provisions in the partnership agreement that outline the process for a partner’s voluntary or involuntary exit from the business.
- Determine the valuation method for a partner’s interest and the terms for buying out a departing partner’s share.
- Consider implementing buy-sell agreements or life insurance policies to facilitate a smooth transition in the event of a partner’s death or disability.
Partnerships Under Texas Laws and Regulations
- Partnership Formation:
- In Texas, a partnership can be formed without a formal written agreement, but it is strongly recommended to have a comprehensive partnership agreement in place.
- Partnerships in Texas are governed by the Texas Business Organizations Code (TBOC).
- Types of Partnerships:
- Texas recognizes general partnerships, limited partnerships (LPs), and limited liability partnerships (LLPs).
- Each type of partnership has different liability implications, tax treatments, and formation requirements.
- Registration and Filing Requirements:
- General partnerships in Texas are not required to register with the state, but it is advisable to file an Assumed Name Certificate (DBA) with the county clerk’s office.
- Limited partnerships and LLPs must be registered with the Texas Secretary of State and comply with specific filing and reporting requirements.
- Liability and Taxation:
- In a general partnership, all partners are personally liable for the debts and obligations of the partnership.
- Limited partnerships and LLPs offer limited liability protection for certain partners, shielding their personal assets from partnership liabilities.
- Partnerships in Texas are generally “pass-through” entities for tax purposes, meaning the income and losses are reported on the partners’ individual tax returns.
- Partnership Disputes:
- The TBOC provides guidelines for resolving disputes among partners, including provisions for mediation, arbitration, and judicial dissolution of the partnership.
- It is essential to include clear dispute resolution mechanisms in the partnership agreement to avoid costly and time-consuming litigation.
It is crucial to consult with a qualified attorney and accountant who are familiar with Texas partnership laws and regulations to ensure compliance and protect the interests of all partners involved.
Partnerships are attractive and effective entity structure choices when setting up your business. While they can be very simple to set up, it is still usually advisable to consult with an attorney who can draft a partnership agreement that protects the interests of the parties involved. San Antonio Business Attorney Nathaniel Gilbert offers flat fee partnership and LLC formation and management packages for businesses in Texas. To consult with Nate directly regarding any questions you might have, Click Here. To read more about Business Law and Management in Texas, Click Here.
