Nathan Roach


Lawyer, Advisor, Investor, Entrepreneur.


Comparing Texas Partnerships

Background

Texas entities structured as partnerships come in three forms:

• the General Partnership (GP)

• the Limited Partnership (LP)

• the Limited Liability Partnership (LLP)

 

In some states, entities can also be a Limited Liability Limited Partnership (LLLP), which is not discussed here, because Texas does not distinguish between an LLP and an LLLP.  It is also worth discussing the Limited Liability Company (LLC) which is not a partnership, but instead a membership-based company that has characteristics of both a partnership and a corporation.  Each of these forms has various characteristics and differences as described below:

 

In Texas, the default association for two or more persons working together in a business is a general partnership.  This is also sometimes known as a joint venture.  A general partnership is defined as “an association of two or more persons to carry on a business for profit as owners.” Tex. Bus. Org. Code §152.051.  You don't need to file any formal documents to be considered a general partnership, and agreement between the partners is all it takes.  This is very similar to the creation of a sole proprietorship for single individual.

 

Unlike a general partnership, the limited partnership requires a filing with the secretary of state. A limited partnership (LP) consists of one or more general partners plus one or more limited partners.  The limited partnership has various protections built in, which are not present in the default general partnership. 

 

Either a general partnership or a limited partnership may be converted to a limited liability partnership by registering as a limited liability partnership (LLP).  These partnerships are required to use the term “limited liability partnership” (or an abbreviation like LLP) or “limited liability limited partnership (LLLP)” (or an abbreviation like LLLP) as an organizational indicator in its legal name. Tex. Bus. Org. Code §5.055.

 

A limited liability partnership (LLP) is not an entity separate and apart from its underlying partnership. Filing an application for registration of an LLP does not create a partnership. Instead, an LLP is a registration that is made by a pre-existing general partnership or a pre-existing limited partnership (LP). 

 

Like an LLP, a limited liability company is created by registering with the secretary of state, but the LLC relies heavily upon the company agreement to set out the relationship between the owners, and it bears many characteristics of both partnerships and corporations. 

 

Management

 

A general partnership is managed by the general partners with each owner having equal power to make company decisions.

 

A limited partnership is usually managed by the general partner(s), with the limited partners exercising little or no control except by voting in certain elections and general membership decisions as specified in the partnership agreement.

 

Limited Liability Company members can choose to be "member managed" which is similar to a general partnership in which each member or partner participates in running the company operations, or they can choose to elect managers ("manager managed") who handle operation of the business, much like how a corporation runs. An LLC is often a more flexible option, but requires a good company agreement to set out the rights and duties of members and managers.

 

Taxation

 

LLPs are taxed like partnerships in a process called pass-through taxation. Company profits are shared equally among partners, and partners report the profits as income on their individual tax returns. By passing the profits through to the partners, the company avoids paying federal taxes on its profits. 

 

LLCs, by default, are also taxed as pass-through entities.  Unlike a corporation, which would file an "S-Corp Election", the LLC gains this tax treatment automatically. However, LLCs also have the flexibility to choose to be taxed as a corporation, in which case company profits in excess of the members' salaries are taxed at the corporate level. Depending on the amount of profit a company makes, in some circumstances this method can be more profitable for the LLC's members.

 

Liability Protections

 

Both LLC and LLP structures provide owners with limited liability protection against their personal assets being subject to lawsuits against the company. The personal assets of LLC members are typically protected from company debts such as business loans, unless a creditor is able to "pierce the corporate veil," a difficult and complicated process.  In a basic general partnership (GP) or limited partnership (LP), the general partners have very little protection.  Limited partners are often capped at the liability of their contribution.  However, Texas law provides for specific partner protection for limited liability partnerships (LLPs): "a partner is not personally liable to any person, including a partner, directly or indirectly, by contribution, indemnity, or otherwise, for any obligation of the partnership incurred while the partnership is a limited liability partnership." Tex. Bus. Org. Code Sec. 152.801.  Although this protection is not absolute, it does provide a "baseline" of protection and does not need to be spelled out in the partnership agreement (although best practices indicate it should).