Texas Partnerships and Limited Partnerships

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Overview

Partnerships, limited partnerships and limited liability partnerships are forms of organization that can be used to pursue social objectives and are recognized as statutory entities under Texas law.  Until the advent of LLCs in 1991, partnerships were the most oft-used alternative to a nonprofit corporation.

Partnerships, similar to LLCs, provide almost unlimited flexibility in governance and management.  Profits and losses are allocated according to the capital contributions of each partner but unlike LLCs and nonprofit corporations, the total assets of each partner in a general partnership are at risk to satisfy the liabilities of the partnership, not just the capital that has been put into the enterprise.  Limited partnerships changed this by permitting the creation of a special class of partners, known as “limited” partners, who provide capital but do not participate in management.  In limited partnerships, the limited partners are shielded from liability beyond their capital contributions, but the general partner—who manages the affairs of the limited partnership—does not have this liability protection.  Limited partnerships are often used as financing vehicles and are most useful when investors are to have no role in management and a simple or flexible governance structure is needed.

Limited liability partnerships (“LLPs”) function like general partnerships but provide extra protections for the general partners.  Such protections include personal immunity for liability arising from the negligence and wrongful acts of other partners, unless the other partners were under their direct supervision.  Thus, a partner’s loss with respect to the LLP is usually limited to his/her investment in the partnership.

General Partnerships

The TBOC governs the formation, operation and dissolution of a Texas general partnership.  A general partnership is formed when there is an association of two or more persons (which term is broadly defined under the TBOC) to carry on as co-owners a business for profit, whether or not the persons intend to form a partnership.  An association formed under a statute other than (i) TBOC, (ii) a predecessor statute or (iii) a comparable statute of another jurisdiction, is not a general partnership under TBOC.

No filings are required in order to form a general partnership in Texas. If the business of the partnership is conducted under an assumed name (a name that does not include the surname of all of the partners), then an assumed name certificate should be filed with the office of the county clerk in the county where a business premise is maintained. If no business premise is maintained, then an assumed name certificate should be filed in all counties where business is conducted under the assumed name.

General partnerships in Texas, when owned by two or more natural persons do not have to pay the franchise tax.  General partnerships that elect to have one general partner or other taxable entities as partners are subject to the franchise tax.  The franchise tax is computed as a percentage of the general partnership’s taxable margin as determined by Section 171.1011 of the Tax Code.  The franchise tax is to be received no later than May 16th of each year.

Once formed, as a general matter, a partnership agreement governs the relations among the partners and between the partners and the partnership.  The partnership agreement may be written, oral or implied.  It is the policy of TBOC to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.  In furtherance of that policy, the partnership agreement may modify many of the default provisions of TBOC that concern the relations among the partners and between the partners and the partnership.  For instance, a partnership agreement may provide for certain partners to have such rights, powers and duties as the partnership agreement may provide, including that any partner or class or group of partners shall have no voting rights.  Subject to the effect the partnership agreement, each partner has equal rights in the management of the partnership.

The partners should decide how to keep and maintain the books and records of the general partnership.  The TBOC contains no specific record keeping requirements, however, the TBOC, as a general matter, establishes that a partner have access to certain information and therefore the general partnership should, at a minimum, keep records of such information.  Such information includes the status of the business and financial condition of the partnership, a copy of the general partnership's federal, state and local income tax returns for each year, a current list of the name and last known business, residence or mailing address of each partner, a copy of any statement and written partnership agreement and all amendments thereto, together with executed copies of any written powers of attorney pursuant to which the statement or the partnership agreement and any amendments thereto have been executed, and information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each partner and which each partner has agreed to contribute in the future, and the date on which each partner became a partner.

Limited Partnerships

The TBOC governs Texas limited partnerships.  A Texas limited partnership is formed when (1) at least two parties have an agreement to form and operate a limited partnership with at least one being a general partner and at least one being a limited partner, and (2) the general partner executes and files a certificate of formation with the Texas Secretary of State.  The certificate of formation needs to contain the name of the limited partnership, the address of the limited partnership’s registered office in the State of Texas, the name and address of the limited partnership’s registered agent in the State of Texas, and the names and addresses of the general partners.  The name of the limited partnership must contain the words “limited”, “limited partnership”, or an abbreviation of that word or phrase.

A limited partnership must pay fees and taxes as set forth in Sections 4.151 and 4.155 of the TBOC, respectively.  Upon filing a certificate of limited partnership, the Texas Secretary of State collects a filing fee of $750.  Limited partnerships are subject to the franchise tax.  The franchise tax is computed as a percentage of the limited partnership’s taxable margin as determined by Section 171.1011 of the Tax Code.  The franchise tax is to be received no later than May 16th of each year.

Once formed, the limited partnership's partnership agreement and the TBOC govern the operation and management of the limited partnership.  The partnership agreement may be written, oral or implied.  It is the policy of TBOC to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.  In furtherance of that policy, the partnership agreement can modify many of the default provisions of the TBOC.  Typically, the general partner manages the business and activities of the limited partnership.

Subject to the partnership agreement, the general partner maintains the books and records of the limited partnership.  The TBOC has no specific record keeping requirements, however, Section 153.552 of the TBOC, as a general matter, establishes that a partner have access to certain information and therefore the limited partnership should at the very least keep records of such information.  Such information includes the status of the business and financial condition of the limited partnership, a copy of the limited partnership's federal, state and local income tax returns for each year, a current list of the name and last known business, residence or mailing address of each partner, a copy of any written partnership agreement and certificate of formation and all amendments thereto, together with executed copies of any written powers of attorney pursuant to which the partnership agreement and any certificate and all amendments thereto have been executed, and information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each partner and which each partner has agreed to contribute in the future, and the date on which each became a partner.

The TBOC also describes the liabilities of the partners.  The general partner has general liability for the debts and obligations of the limited partnership to third parties.  A partnership agreement may modify the liability of a general partner to the limited partnership and the limited partners.  So long as a limited partner is not also a general partner and does not otherwise participate in the control of the business of the limited partnership, a limited partner does not have liability for the obligations of a limited partnership. A limited partner does have liability for any unperformed contributions that such limited partner has agreed to make to the limited partnership if in writing and signed by the limited partner, the amount of any distribution that such limited partner is required to return to the limited partnership pursuant to the TBOC, and their own tortious or wrongful acts.

Limited Liability Partnerships (LLPs)

The TBOC governs Texas LLPs.  An LLP is a general partnership that has elected to become an LLP.  LLPs in Texas are not formed but are instead previously created general partnerships that decide to register as LLPs.  A general partnership may register as an LLP pursuant to Section 152.802 of the TBOC.  In order for an existing general partnership to register an LLP, the terms and conditions on which the general partnership registers as an LLP must be approved by the vote necessary to amend the partnership agreement and, in the case of a partnership agreement that expressly considers obligations to contribute to the general partnership, also the vote necessary to amend those provisions, and after such approval, the general partnership must file an application in accordance with the TBOC.  All LLPs must carry $100,000 in liability insurance or set aside $100,000 for payment of any judgment against the LLP.  An LLP continues to be the same partnership that existed before the filing of its application.  A limited partnership may also become a limited liability partnership.

The application to become an LLP must contain:  (1) the name of the partnership; (2) the address of the registered office in the State of Texas and the name and address of the registered agent in the State of Texas for service of process;  (3) the number of partners of the partnership; (4) a statement that the partnership elects to be an LLP; (5) and the future effective date or time of the application if it is not to be effective upon the filing of the application.  The name of the LLP must contain the phrase “limited liability partnership," or an abbreviation of the phrase.

The filing fees relating to an LLP are set forth in Section 4.158 of the TBOC.  An LLP must pay a filing fee with the application to the Texas Secretary of State in the amount of $200 per partner.

In general, an LLP is managed and operated the same as a general partnership.  The partnership agreement governs relations among the partners and between the partners and the LLP.  The partnership agreement may be written, oral or implied.  The partnership agreement may modify many of the default provisions of the TBOC that concern the relations among the partners and between the partners and the LLP.

Partners of an LLP do have different liabilities than partners of a general partnership.  An obligation of an LLP, whether arising in contract, tort or otherwise, is solely the obligation of the LLP and a partner is not personally liable, directly or indirectly, by way of indemnification, contribution, assessment or otherwise, for such obligation of the LLP solely by reason of being or acting as a partner.  Notwithstanding the above, under a partnership agreement or under another agreement, a partner may agree to be personally liable, directly or indirectly, by way of indemnification, contribution, assessment or otherwise, for any or all of the obligations of the LLP.  Furthermore, a partner is responsible for the amount of any distribution that such partner is required to return to the LLP pursuant to the TBOC.  A partner may have an obligation or liability under an agreement or other applicable law for the amount of a distribution.  A partner is also personally liable for its personal misconduct.

Resources

Secretary of State
P.O. Box13697
Austin, TX 78711
Phone - (512) 463-5555
www.sos.state.tx.us/corp

Texas Office of the Comptroller
www.window.state.tx.us/taxes

Transactional Lawyer's Deskbook:  Advising Business Entities (Arthur Norman Field & Morton Moskin eds.)

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