How to Form a Partnership in Texas?
How to form a partnership in Texas depends on what type of partnership you intend to form.3 min read
How to form a partnership in Texas depends on what type of partnership you intend to form. Generally, when two people mutually own and operate a business, a partnership exists.
Forming a Texas General Partnership
In Texas, common law has recognized both joint ventures and general partnerships. When determining if such a relationship has formed, there are four factors taken into consideration:
- Mutual interest.
- Mutual control.
- Profit sharing.
- Loss sharing.
For a general partnership or a joint venture to exist, all four of these issues must have been present. Under these rules, there is no legal difference between these two entities, but there are some practical differences. Basically, the difference between general partnerships and joint ventures is dependent upon the length of the relationship. Whereas parties form joint ventures for a specific purpose with a limited duration, general partnerships involve an ongoing business relationship.
The Texas Uniform Partnership Act rejected the common law requirements for forming a partnership. The four previously mentioned factors are still used to determine whether a joint partnership exists, but the court has decided that the Texas Revised Uniform Partnership Act holds the final say as to whether a partnership exists.
The purpose of this law was to move away from the four elements and to define partnerships based on the nature of the arrangement. Under this law, a partnership is created any time two people work together in a business endeavor for the purpose of making a profit. These actions create a partnership whether or not is was the intent of the parties and regardless of what they call the arrangement.
Based on the Revised Uniform Partnership Act, a partnership exists when five elements are present:
- There is a right to share business profits between two or more people.
- Two or more people express intent to be partners.
- Multiple people are participating as business partners or have the right to participate.
- Business losses and liabilities are shared, or there is an agreement to share.
- Partners agree to contribute assets to the business.
Forming a Limited Partnership
Texas also allows for the forming of limited partnerships (LPs). These partnerships consist of at least one general partner and one limited partner. The general partner is responsible for operating the business and making any business decisions. A Limited Partnership Agreement will set forth the powers of the general partner. Generally, limited partners only contribute financially to the partnership.
In Texas, limited partnerships do not need to file the partnership agreement in the public record. These businesses do, however, need to file a document known as a Certificate of Formation. The Certificate should be filed with the Texas Secretary of State.
The purpose of forming a limited partnership is to provide liability protections to the limited partnership. Every LP needs a partnership agreement. The main purpose of the partnership agreement is to outline the general partner's responsibilities and rights. This document may also describe situations where the limited partner will have the ability to vote on business operations.
In most cases, the limited partner cannot be personally held responsible for the liabilities of the partnership. There are two exceptions to this rule. First, if the limited partner also acts as a general partner, their personal assets may be at risk for business debts. Second, if the limited partner is an active participant in the operations of the business, they can be liable for the partnership's debts.
If the limited partner is involved with business operations, they can usually only be held liable if they transact business with a person and that person reasonably believes the limited partner is a general partner. To form a limited partnership, a partnership agreement should exist between the general and limited partners and a Certificate of Formation must be filed with the state. The partnership agreement should be stored in the business's internal records.
When drafting a partnership agreement for a limited partnership, there are several issues to define:
- What constitutes management activities.
- Each partner's duty to contribute to the business.
- A description of the different partner classes and their voting rights.
- A rule that prohibited distributions will be returned.
- How interested transactions will occur.
- How a partner can withdraw from the relationship.
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