There are many advantages to forming a partnership, most notably the combination of skills and resources that different partners bring to the business venture. There are also various options for how the partnership can be structured. Regardless of how good your business relationship is with your partners, it is imperative that everyone enter into a partnership agreement. A Houston business partnership lawyer can help you draft a customized agreement that works for your organization. Count on the experienced counsel of Capstone Legal Strategies.

The Different Types of Partnerships

Most Texas business partnerships are organized as either a general partnership or limited partnership:

General Partnership (GP)

A General Partnership (GP) is the simplest form of partnership. In a GP, all partners share equal responsibility for the management of the business and are personally liable for the debts and obligations of the partnership. There is no requirement for a formal written agreement, although having one is highly recommended.

Formation

Forming a GP in Texas is straightforward and does not require filing with the state. However, partners may choose to file an assumed name certificate (DBA) if they are operating under a business name that is different from the partners’ names.

Benefits

  • Simplicity: Easy to form and operate with minimal formalities.
  • Shared Management: Partners share management responsibilities and decision-making.
  • Taxation: Profits and losses pass through to the partners’ personal tax returns, avoiding double taxation.
  • No Franchise Tax: In Texas, a GP does not file or pay franchise taxes. 

Drawbacks

  • Unlimited Liability: Partners are personally liable for the debts and obligations of the business.
  • Joint Liability: Each partner can be held liable for the actions of the other partners.
  • Continuity: The partnership may dissolve if one partner leaves or dies unless provisions are made in the partnership agreement.

Limited Partnership (LP)

A Limited Partnership (LP) consists of at least one general partner and one or more limited partners. General partners manage the business and have unlimited liability, while limited partners contribute capital but do not participate in management and have liability limited to their investment.

Formation

Forming an LP in Texas requires filing a Certificate of Formation with the Texas Secretary of State. The partnership must also create a written partnership agreement outlining the rights and responsibilities of the partners.

Benefits

  • Limited Liability: Limited partners’ liability is restricted to their investment.
  • Attracting Investors: LPs can attract passive investors who want to contribute capital without being involved in management.
  • Flexibility: The structure allows for flexibility in management and profit distribution.
  • Tax Efficiency: Arguably one of the most tax efficient entity structures in Texas. 
  • Continuity: A LP continues to operate as long as there is a general partner and one limited partner. 

Drawbacks

  • Complexity: More complex and formal to establish and maintain than a GP.
  • Unlimited Liability for General Partners: General partners still have unlimited liability for the partnership’s obligations.
  • Regulatory Compliance: Must adhere to state filing requirements and maintain good standing. 
  • Tax Filings: Because there are generally 2 or more entities, the structure may have to pay for multiple tax returns. 

There are three other, less common types of partnerships:

Limited Liability Partnership (LLP)

This business structure is more frequently used in industries that have high liability risks. Partners only have liability exposure for the portion of the business that they directly created. They are not liable for the debts of other partners. An LLP pays franchise taxes.

Limited Liability Limited Partnership (LLLP)

A Limited Liability Limited Partnership (LLLP) is a newer type of partnership that combines elements of both LPs and LLPs. In an LLLP, both general and limited partners have limited liability protection. This type of partnership is often used when there is high liability risks, but the individuals want to operate through a limited partnership, rather than a general partnership with a LLP registration. 

Joint Venture (JV)

A joint venture can be one of two types (1) a special type of general partnership that is organized for a limited purpose or (2) a LLC that is made up of at least 2 partners acting towards a common goal. In the case of the first one, it usually only lasts long enough to carry out a single, specific transaction, for example in real estate or foreign market investments. In the first type, the joint venture partners are fully liable for their debts and they report income on their personal returns, just like a general partnership.

What Should Be Covered In A Partnership Agreement?

A well-drafted partnership agreement is the cornerstone of a successful business partnership. It sets clear expectations, defines roles and responsibilities, and helps prevent disputes by providing a roadmap for how the partnership will operate. In Texas, as in other states, a comprehensive partnership agreement is essential for ensuring smooth collaboration and protecting the interests of all partners. A well-drafted partnership agreement will address several items, such as:

  • Rights and duties: The agreement should clarify each partner’s respective roles and responsibilities concerning the partnership. This important step helps ensure that partners don’t interfere with each other’s work in running the business.
  • Ownership rights: Ownership of the assets that the partnership acquires or produces should be specified so every partner knows what is theirs. Be sure to deal with any intellectual property rights your partnership may have now or in the future.
  • Liability sharing: As between the partners, they can decide how to apportion liability for judgments against and debts of the business. The agreement should be clear on whether and to what extent a partner will be responsible for various liabilities.
  • Exit rights and exit valuation: At some point, a partner may retire or otherwise decide to leave the business. The typical way to handle this is to conduct a buyout. Deciding on triggering events, whether a partner is able to retain an interest in the partnership under certain circumstances, and a valuation method can save time and hassle for when these events occur.
  • Dispute resolution methods: No matter how amicable the partners are with one another, disputes will inevitably arise. The partnership agreement can specify how these disputes are handled, for instance by mediation or arbitration.
  • Business practices: Your partnership is different from anyone else’s in the way that it conducts business. You can use the partnership agreement to formalize these practices so it becomes easier to enforce them in the event a partner strays.
  • Dissolution: Eventually, the partnership may come to an end. The valuation method you’ve selected will play a role in winding down and eventually dissolving the business. Other steps and guidelines can be included here.
  • Restrictive covenants and confidentiality: Your partnership should include non-compete agreements (to the extent still allowed by law), non-solicitation agreements, and other restrictive covenants to protect your business. It should also make it clear that sensitive customer or client information must remain confidential.
  • Profit and loss distributions: The partnership agreement should specify how profits and losses will be distributed among the partners, how losses will be shared and profit distributions, both as to who has the ability to make distributions and the timing of such distributions. 
  • Contributions and ownership: Define the initial contributions and ownership interests of each partner. This section should include, at a minimum: Capital Contributions (the amount of money, property, or other assets each partner is contributing to the partnership), Additional Contributions (procedures for additional capital contributions, if needed), and Ownership Percentages (the ownership percentage of each partner based on their contributions). 
  • Management and decision-making: Outline the management structure and decision-making processes of the partnership. Key points to cover, at a minimum, would include: Management Roles (the roles and responsibilities of each partner in managing the business), Voting Rights (the voting rights of each partner and the process for making decisions, including the percentage of votes required for various types of decisions), and Authority Limits (the limits of authority for each partner, such as spending limits or decision-making thresholds that require consensus or majority approval).

Contact Our Houston Business Partnerships Attorney

A well-drafted partnership agreement is essential for establishing a strong foundation for your business partnership. By addressing key elements such as contributions and ownership, profit and loss distribution, management and decision-making, dispute resolution, and financial matters, you can create a comprehensive and effective agreement that protects the interests of all partners and promotes smooth collaboration.

In Texas, ensuring compliance with state laws and considering liability protections and tax implications are crucial components of the partnership agreement process. Consulting with experienced legal and financial advisors can provide valuable guidance and help you navigate the complexities of partnership formation and operation.

By taking the time to create a thorough and well-structured partnership agreement, you can set your partnership on a path to success, minimize potential conflicts, and achieve your business goals with confidence.

Whether you are currently forming a partnership, terminating one, or you are in the midst of a legal problem involving another partner or a third party, we are ready to serve you. We can also help with drafting a partnership agreement, even if your business has already started operating. That’s the level of comprehensive representation you can expect from Capstone Legal Strategies. Give us a call today to learn more.