Forming a Limited Partnership in Texas

How and When to Form a Limited Partnership in Texas

Not to be confused with a general partnership or a Limited Liability Partnership, a limited partnership is formed by at least two people with at least one general partner and at least one limited partner. Tex. Bus. Org. Code Ann. § 1.002(50). The general partner in the partnership manages the business and has unlimited liability for all business decisions and any debt incurred. As the label implies, limited partners have limited decision-making ability and their financial liability is limited to no more than the amount of their investment. Shindler v. Marr & Associates, 695 S.W.2d 699, 703 (Tex. App.—Houston [1st Dist.] 1985, writ ref'd n.r.e.). A partnership agreement, which can be either written or oral, does not have to be filed as public record. However, like a general corporation, a limited partnership must file a certificate of formation with the Texas Secretary of State. By filing the certificate of formation on-line through SOSDirect, a limited partnership meets the minimum state law requirements. Tex. Bus. Org. Code Ann. § 3.001.

Forming a limited partnership instead of a general partnership provides several advantages, especially for the limited partner. While partners within a general partnership are liable for any debts and obligations of the partnership, limited partners are liable only for the amount of money they have invested. Tex. Bus. Org. Code Ann. § 153.102(a); See Matter of Marriage of Dilick, 550 S.W.3d 766 (Tex. App.—Houston [14th Dist.] 2018, pet. denied). Of course, limited liability translates to limited decision-making power in the partnership.

Another advantage of a limited partnership is the ability to raise capital more easily without borrowing money from banks or other lenders. Because liability is limited, limited partners may use this type of partnership as an investment opportunity. Often appealing to a greater number of investors, a limited partnership can increase capital through investments by limited partners without increasing debt. Another big advantage is that a limited partnership is not subject to double taxation as may happen in a general corporation.

Deductions for limited partners used to be a huge financial benefit for some, but this misuse of limited partnerships as tax shelters led to a curtailing of deductions. 26 U.S.C.A. § 456. Until the laws were changed, limited partners could claim deductions for losses that were much higher than what they had originally invested. At this time, however, deductions are limited to the amount of money that a limited partner has invested.

One of the major disadvantages of a limited partnership is the lack of decision-making power. While limited partners invest their own money, they are not allowed in any way to manage the business of the partnership. When limited partners do involve themselves in managerial decisions, they then become liable for business debts and obligations just as the general partner is.

Available on-line forms do not always reflect the complexity of creating a limited partnership. Consulting a business attorney familiar with the long-term impact of decisions as well as with the necessary forms is a vital part of creating a successful limited partnership, one which benefits all involved.

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