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Advantages and drawbacks of the Texas general partnership

Posted by Chris Peterson | Feb 06, 2013 | 0 Comments

Advantages and drawbacks of the Texas general partnership

If you plan to start a business with another person, a partnership is one possible legal structure.  A Texas general partnership is a relationship between two or more persons who carry on a trade or business.  Each person contributes something of value to the business– money, property, or labor—with the expectation of sharing in the profits and losses of the business. If you are currently in business with another person, you have already established a partnership.  A Bryan-College Station Texas business attorney can help you formalize your arrangement or adopt a different form of business organization should that better suit your needs.

Setting up a partnership

One advantage of the partnership form of business is that it is relatively easy and inexpensive to establish and operate.  Like a sole proprietorship, a general partnership does not require any formal documents or state filings.  However, you absolutely should have a written partnership agreement for practical reasons.  Though not a legal requirement, a written agreement will provide a charter for operating your business and will help prevent disputes among the partners.

Your partnership agreement should describe how you and your partners will manage the business.  It should also cover what capital, property, and services you each will contribute, how you will divide the profits and losses between you, and how you will be compensated.  Finally, it should contain buy-sell provisions that provide what will happen to the business when one partner dies, becomes disabled, or wants to sell his or her interest and leave the partnership.

In addition, unless you use the last names of the partners as the name of your business, you will need to file an assumed name certificate (DBA) in the county where your business premises are located.  If you have no business premises, you will need to file in each county in which the partnership does business.

A partner's rights and responsibilities

In a Texas general partnership, each partner has equal say in the partnership's management, unless the partners agree otherwise. Partners are in a “fiduciary” relationship with each other.  This means that they have a duty to act in good faith for the benefit of all partners in business transactions and the duty to refrain from taking advantage of one another.   Unless the partners agree otherwise, new partners can't join the partnership without the consent of all existing partners.

Personal liability

The main drawback of the general partnership is that each of the partners has unlimited liability for partnership debts.  In other words, if the partnership doesn't make enough money to pay its bills, creditors can sue the individual partners and get at their personal assets.

In addition, any partner can sign a contract that obligates the entire partnership and all the partners, even if the other partners don't agree in advance.  And, if one partner injures someone while on partnership business, the partnership and all the partners are liable.

Despite the lack of limited liability, a general partnership may be a good choice for a start up business that is at low risk for being sued.  Liability insurance can protect against many business risks.  However, it's smart to find a qualified insurance professional to assess your risks and advise you on appropriate coverage.  As your business grows and becomes more successful, you will probably want to consider an LLC or corporation, which will provide the business owners with protection from creditors of the business.

Limited liability partnerships

Another option to obtain is to register with the Secretary of State as a limited liability partnership (LLP).  The liability of partners in a limited liability partnership is limited to the amount of their partnership investment.  A partner has no personal liability for any obligation of the partnership incurred while the partnership is a limited liability partnership.

However, one drawback to LLPs is that they are more expensive to maintain than other business organizations because the State imposes a registration fee of $200 per year per partner.

Get help from an experienced Texas business attorney

If you have questions about the legal requirements for setting up your business, the Bryan-College Station, Texas business attorneys at the Peterson Law Group would like to help.  Phone us 979-703-7014 to schedule a consultation.

About the Author

Chris Peterson

Chris Peterson is the owner of Peterson Law Group. He practices primarily in the areas of wills, trusts and estate planning; probate and trust administration; elder law; and business law. Chris is also the owner of Brazos 1031 Exchange Company.


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