When you start a business one of the first things you’ve got to decide is which business structure your business will take. Each structure offers different combinations of tax advantages, liability protection, and other unique advantages. This article will help you understand how partnerships differ in Texas so you can choose the one that may be best for you.
Types of Partnerships: Liability & Tax Considerations
Two important topics to consider when you are forming a business are taxation and personal liability. In Texas partnerships are generally taxed as pass-through entities, meaning the profit and losses from the businesses pass directly into the partners’ personal incomes.
Texas does not have a state income tax, but some partnerships are required to file a yearly registration with the state and many partnerships paying a franchise tax. This can be done online at the Texas Department of Revenue’s website. Further details on how Texas handles partnership taxes and fees can be found at this link. The Internal Revenue Service has useful tips on some of the federal requirements for partnerships.
Personal liability is the other important topic to consider when forming a business. Liability refers to how personally responsible you are for your business’ debts and obligations. If you are fully liable for your business’s debts then your personal assets such as property or savings, can be used to settle outstanding business debts. Some partnerships offer limited liability, protecting your assets from some types of debts.
The types of partnerships offered in Texas are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
General partnerships are the most fundamental type of partnership. General partners are completely personally liable for all partnership debts. Partners account for income from the GP (typically according to their share of ownership) in the same way they account for any other personal income derived from within Texas. GPs are not subject to the state franchise tax.
Limited Partnership (LP)
Limited partnerships allow two types of partners, limited and general partners. Limited partners aren’t liable for business debts beyond their own investment in the business, but general partners remain fully liable for the LP’s debts. All LP partners account for the LPs revenue, according to their share of ownership, on their personal returns just like with GPs. LPs are subject to the franchise tax.
Limited Liability Partnership (LLP)
Typically preferred by professionals in high liability fields, limited liability partnerships offer protection to partners from business liabilities they had no hand in creating themselves. They do remain fully liable for business debts they participated in creating.
LLPs are taxed in the same way that GPs are, but may be subject to greater regulation due to their limited liability entity status. LLPs are subject to the franchise tax.
Limited Liability Limited Partnership (LLLP)
Limited liability limited partnerships allow limited partners whose liability for business debts is capped at the total amount of their investment. LLLPs also offer protection to general partners from business debts not of their own making.
LLLPs are still considered pass-through entities and are taxed the same way as other partnerships. LLLPs are subject to the franchise tax.
How to Form a Partnership in Texas
In order for a partnership to be properly created, the partners must go through several steps.
Step 1: Select a business name
Business owners may be very creative when creating their business’s name. However, they should bear in mind that business names have an effect on how appealing the business is to customers and how the business is perceived by the general public. Additionally, most business names must include the choice of entity in their title (Car Mechanic, LLP for example).
Step 2: Register the business name
Before attempting to file your business name, check with the Secretary of State to make sure the name is available. Once that’s done, protect your new business name by filing it with the Texas Secretary of State.
Step 3: Complete required paperwork
Most Texas partnerships are required to pay a filing fee along with filing any required paperwork. Foreign businesses typically have additional and/or different fee and form requirements.
- General Partnerships (GP) – GPs need not register with the Secretary of State beyond filing an Assumed Business Name Registration (DBA) with the Texas Secretary of State. It is highly encouraged that all partnership agreements be recorded in writing.
- Limited Partnerships (LP) – Texas LPs must file a Certificate of Limited Partnership.
- Limited Liability Partnerships (LLP) – LLPs must turn in a Registration Application with the Texas Secretary of State.
- Limited Liability Limited Partnerships (LLLP) – An LP may choose to further enhance its liability protections by registering as an LLLP. This is done by filing an Application for Registration of an LLP with the Texas Secretary of State.
Step 4: Determine if you need an EIN, additional licenses or tax IDs
If you plan on hiring employees, you’ll need to get an Employer Identification Number (EIN) from the IRS. Even if you aren’t hiring employees, an EIN is helpful for opening business bank accounts, credit cards, and more. It’s highly recommended you get one from the IRS.
Some partnerships need additional licenses from the state in order to do business. For example, plumbers, electricians, and other types of contractors usually need to be licensed to do business. Additional taxes may also be needed, check with the Secretary of State.
Step 5: Get your day to day business affairs in order
Once the Secretary of State has approved your paperwork and sent you a certified, stamped copy of the paperwork back, you’re able to do business. Here are a few things to consider as you get started with your business:
You’ll need to open a bank account in your business’s name to keep your liability protection in tact (if your partnership type offers liability protection).
You’ll need a physical address where the business can receive mail and legal notices.
Make sure you have a partnership agreement on hand. This is a document that outlines how the partnership will be ran and includes details such as how to deal with partners that leave, adding new partners, changing the business, or shutting the business down.
Ready to start your partnership? LegalZoom will help you choose which one may be right for you. We can also file the paperwork to form your business, help you find a registered agent, and get you in touch with an attorney or tax professional.