Considering a Partnership? Understand the Commitment Before You Make the Decision
Texas business partnerships come in two forms: the general partnership, and the limited partnership. A general partnership is the simplest of the business entities, and it’s when two or more partners come together to form an enterprise. A general partnership can exist without filing anything with the Secretary of State - the association and sharing of profits and losses can create a partnership. Unfortunately, it’s very easy for partners to get into tricky situations without realizing it, which is why it’s important to create a written partnership agreement to set out the partners’ responsibilities, ownership interests and how the partnership will work.
A limited partnership is a sort of hybrid between a general partnership and a corporation. It provides some protection for its limited partners from the debts and claims of the business entity, but still allows the partners to pass profits and losses directly through the entity to the partners. A limited partnership must file a certificate of limited partnership with the Secretary of State of Texas, and it’s a good idea for the partners to create a written partnership agreement defining the general and limited partners, and their respective duties and rights.
Is Another Type of Business More Appropriate for Your Goals?
Partnerships are simple business entities to form, but the pass-through nature of the profits and losses may mean they’re not appropriate to all types of businesses.
For example, the partnership will pass through its profits to the partners, which the partners must then pay taxes on as income. In some cases, it would be more advantageous to have the profits retained by the company and distributed on the schedule that’s most advantageous, or even reinvested in the company, instead of simply passing them through to the partners.
Additionally, a general partnership offers no shield from personal liability, and one partner has as much authority and responsibility as any other partner. If you want to limit the authority of one of the partners, or shield yourselves from personal liability, another type of business entity may be more appropriate.
Give us a call here at The Posey Law Firm, P.C. to discuss whether a partnership is right for you, or whether another type of business entity may be more appropriate to your needs.