In Texas there are three general kinds of partnerships: General Partnerships, Limited Partnerships, and Limited Liability Partnerships.
In a General Partnership, you and at least one other person agree to form a partnership; there is no filing necessary with the Texas secretary of state. There is no corporate protection for any liability and the partners are jointly and severally liable for the debts and liabilities of the partnership. Because of the lack of corporate formalities required to start a partnership, General Partnerships are very attractive to startup companies, but the lack of any liability protection should dissuade all but some very limited partnership ventures from using this corporate structure.
Limited Partnerships must have one or more general partners as well as one or more limited partners. To form an LP, you will need to file a form with the Secretary of State of Texas, and banks and other service providers will most likely require a partnership agreement of some kind. In the tiered partnership structure, general partners share all of the liability for the debts and liabilities of the partnership, while limited partners are only liable up to the amount they initially invested in the company. This liability protection for limited partners does come at a cost: limited partners in LPs have no managerial discretion or ability to direct the business of the LP.
Limited Liability Partnerships extend the liability protections of an LP to all partners. LLPs are common entity structures for attorney firms and doctor offices, as all partners receive liability protection to an extent, and are only liable only if the liability is due to the fault of one of the partners. The main drawback for LLPS in Texas is the cost associated with filing with the Secretary of State, which is $200 per partner and the required $100k in liability insurance.
Forming a partnership of any kind in Texas requires careful consideration of not only what your business looks like today, but what you want your business to look like in five years or even ten years. Avoiding what might seem like expensive costs now could mean a more expensive restructuring or refiling later on. Texas Business Attorney Nathaniel Gilbert helps clients choose the right entity structure that best fits the direction their business is headed; For a free consultation with Nate, click here to call now. If you want to learn more about partnerships and business law in Texas, click here.
Partnership vs. LLC Comparison
Understanding the differences between partnerships and LLCs in Texas can help you decide which structure best fits your business needs.
| Feature | General Partnership (GP) | Limited Partnership (LP) | Limited Liability Partnership (LLP) | Limited Liability Company (LLC) |
| Liability | Unlimited liability | Unlimited for general partners; limited for limited partners | Limited liability for all partners | Limited liability for all members |
| Management | Shared by partners | General partner manages; limited partners are passive | Shared by partners | Managed by members or designated manager |
| Formation Process | Minimal, often verbal | Requires state registration | Requires state registration | Requires state registration |
| Ownership Transfer | Difficult without dissolving | Possible for limited partners | May require agreement, but possible | Flexible, defined by operating agreement |
| Best For | Small businesses with trusted partners | Investment-heavy businesses | Professional firms needing liability protection | Businesses seeking liability protection and flexibility |
Pros and Cons of Choosing a Partnership vs. LLC
Partnership Advantages:
- Simplicity: Partnerships are generally easier to set up and operate, especially general partnerships with minimal paperwork.
- Direct Management: Partners directly manage the business, making this structure ideal for owners who want an active role.
- Profit Flexibility: Partnerships can be more flexible in distributing profits according to the agreement among partners.
Partnership Disadvantages:
- Personal Liability: In general partnerships and LPs, general partners assume personal liability, which can be a significant risk.
- Limited Growth Potential: Partnerships may face more difficulty in attracting investment, as investors may prefer limited liability structures like LLCs.
LLC Advantages:
- Limited Liability: All members are protected from personal liability for business debts and claims.
- Growth Potential: LLCs are often more attractive to investors, as they provide liability protection and more flexible ownership structures.
- Tax Options: LLCs allow for flexibility in tax treatment, including options to be taxed as a sole proprietorship, partnership, or corporation.
LLC Disadvantages:
- More Formal Requirements: LLCs require formal operating agreements and adherence to state regulations.
- Costlier Setup and Maintenance: LLCs generally have higher filing and annual maintenance fees than partnerships.
FAQs on Partnership Requirements
To provide clarity, here are answers to some frequently asked questions about starting and managing partnerships in Texas:
While general partnerships can be formed with a verbal agreement, it’s advisable to create a written partnership agreement detailing responsibilities, profit-sharing, and dispute resolution methods. Limited partnerships and LLPs require registration with the Texas Secretary of State, along with any additional documents specified for their structure.
Texas doesn’t mandate a written partnership agreement for general partnerships, but having one can prevent misunderstandings. The agreement should outline each partner’s rights, obligations, capital contributions, and profit distribution, as well as procedures for resolving disputes and handling partnership dissolution.
A general partner is involved in the daily management of the business and assumes personal liability for the partnership’s obligations. Limited partners, on the other hand, typically only invest capital and do not participate in management, thereby limiting their liability to the extent of their investment.
Yes, partnerships can convert to an LLC. This process involves filing a certificate of conversion and formation documents with the Texas Secretary of State. LLCs provide additional liability protection and are often preferred for businesses seeking a more formal structure.
Dissolving a partnership in Texas typically involves a few steps, starting with reviewing the partnership agreement to understand the agreed-upon process for dissolution. Partners should then file any necessary paperwork with the Texas Secretary of State, such as a certificate of dissolution for LLPs or LPs. It’s essential to settle outstanding debts, notify creditors, and distribute any remaining assets according to the partnership agreement.
Yes, Texas partnerships can have non-resident partners. However, non-resident partners may be subject to specific state and federal tax requirements and should consult with a tax professional to understand their obligations. Non-resident partners should also be aware of any additional filing requirements, particularly if the partnership operates in multiple states.
