You might think the arrangement you have with your business partner is just fine the way it is, with a handshake agreement, and your business plan on a napkin. You work well together, agree on most things, and share a common vision and Texas-sized enthusiasm for your business. What could possibly go wrong?
Texas Partnership Law
While there is no legal requirement to have a partnership agreement in Texas, it is strongly advised for numerous reasons. A written partnership agreement provides a framework for the operation of the organization, outlines each partner’s responsibilities, and provides a blueprint to follow when situations arise that did not even cross the partners’ minds in the frenetic early days of the business.
If there is no partnership agreement in place, your Texas partnership will likely be governed by the Texas Business Organizations Code (TBOC). Written to govern a wide variety of partnership arrangements, the TBOC will likely not provide the best set of rules for your partnership. For example, the TBOC specifies that if one partner dies or chooses to leave the business, the partnership must be dissolved. In the long run, it is a smart move to take the time and effort to create a partnership agreement that is tailored to your business and its needs.
While it is possible to do it yourself, it is best to create your Texas Partnership Agreement with the help of a seasoned business law firm to ensure that all your bases are covered. Before meeting with an attorney, the partners should discuss these points.
Type of Partnership
What type of partnership is right for your business? In a general partnership (GP), partners are not subject to the state franchise tax, and the partners bear personal liability for the debts of the partnership. Both GPs and are pass-through entities, meaning that the entity is not taxed but the business owners pay taxes on their income individually.
In a limited partnership (LP), there are both general partners and limited partners. Limited partners are only liable for the amount of their investment in the partnership while general partners bear full liability. LPs must pay Texas franchise tax. LPs are pass-through entities and both general and limited partners report income on their individual tax returns.
Limited liability partnerships (LLP) are good for those in certain professions (doctors, lawyers) that are subject to malpractice claims. The LLP protects partners from being held liable for an error made by one of the other partners. All partners in an LLP are responsible for business debt they had a hand in incurring. Partners in an LLP pay taxes in the same way general partnerships do. An LLP is subject to the Texas franchise tax.
Limited Liability Limited Partnerships (LLLPs) are similar to LLPs but allow for limited partners whose liability for business debts will not exceed the amount of their investment in the business. In this type of partnership, general partners are also protected from debts they did not participate in creating. LLLPs are subject to the franchise tax and as pass-through entities are taxed just as the other partnerships are taxed.
Basic Information to Include in the Partnership Agreement
Your partnership agreement should include the name of the partnership, the purpose of the partnership, the partners’ names, and if known, how long the partnership will remain in effect.
Other key components to include in the partnership agreement are:
- Roles of the partners, their business responsibilities, their required commitments of time (full-time vs. part-time), assets, money, etc.
- Distribution of income, profits and losses to the partners
- Conflict resolution procedures; discipline for misconduct of a partner, expulsion of a partner
- Procedures for the addition or withdrawal of partners from the partnership including rules for buyout, death of a partner, retirement, transfer of partnership to heirs, etc.
- Non-compete agreements
- Dissolution procedures
- Financial matters including banking privileges, accounting methods and responsibilities, method of valuation of the partnership, etc.
This list provides a top-level view of the items that should be considered carefully before entering into a partnership arrangement in Texas, but this list is just meant as a jumping off point for more in depth discussions. Business partners are advised to consider the above issues in depth and to meet with a Dallas business attorney to get the terms of their partnership agreement in writing, to be sure all parties are on the same page. The attorneys at Bennett Weston LaJone & Turner, P.C. are an excellent resource to consult when you need to talk through questions about business partnerships or any other business law matter.