Starting a business in Texas is an exciting venture, but you need to make sure from the very beginning that you do it right. Different business entities offer different advantages while presenting possible disadvantages. A general partnership is one type of business entity you may wish to consider. It is a flexible option that provides a good amount of control over the operations, but it comes with considerable liabilities.
What is a General Partnership?
A general partnership is an unincorporated business structure where two or more partners agree to co-own and run a for-profit business.
Under a general partnership, each partner has control over the day-to-day management of the business. Unless otherwise addressed in a partnership agreement, a general partnership dissolves when a partner exits the partnership or dies.
General partnerships are pass-through entities for tax purposes, meaning the partnership itself is not taxed at a corporate level. Instead, the profits and losses are passed on to the partners who report them in their individual tax returns and are taxed at the personal rate.
Two of the main features of a general partnership are the partners' unlimited liability and their fiduciary duty.
In a general partnership, partners have unlimited personal liability for the business's debts, liabilities, and lawsuits. In addition, each partner is considered an agent of the other partner(s) and can enter into binding business agreements on their behalf. Partners are also personally liable for any lawsuit arising from another partner's actions.
This feature means general partnerships require a high degree of trust between the partners, making them a common structure for family-owned and run businesses.
In a general partnership, each partner owes fiduciary duties to the other partners. Fiduciary duties ensure that partners act in the best interests of the partnership. They include the:
- Duty to act in good faith, that is, to act fairly and honestly with each other in any activities involving the partnership
- Duty to exercise reasonable care in managing the partnership – for example, by maintaining accurate business records
- Duty to disclose to other partners any relevant information about the potential impacts (positive or negative) of any decision affecting the partnership, including any conflicts of interest
The specific fiduciary duties owed in a general partnership are set out under state law. Fiduciary duties can also be modified by a partnership agreement in certain circumstances.
If a partner breaches their fiduciary duties, the other partners may be able to sue them for any losses sustained as a result of the breach.
General Partnership Formation in Texas
You do not need to formally register a general partnership. A general partnership can be formed by a verbal or written agreement, or simply because of how a business operates. If the business has the features of a general partnership, the law will treat it as such.
While it is not legally required, it is a good idea to use a written partnership agreement. A partnership agreement sets out important terms, like:
- The management structure of the partnership
- How profits and liabilities are shared
- The process when a partner wants to leave the partnership
- Reasonable modifications to any statutory fiduciary duties
- Partners' financial contributions to the partnership
- Voting rights
- Dispute resolution processes
- Dissolution of the partnership
A carefully drafted partnership agreement can reduce the risk of disputes between the partners and protect the business.
Advantages of a General Partnership in Texas
The advantages of a general partnership are many and include but are not limited to the following:
- Lack of bureaucracy. General partnerships are easy to set up as you are not required to file any registration documents. Unlike a corporate structure, there are also no ongoing compliance requirements, like annual reports. So, it can be quicker and cheaper to start and run a general partnership compared to other business structures, like a limited liability partnership.
- Flexibility. General partnerships allow partners a large degree of flexibility to define the management structure and procedures under a partnership agreement.
- Simplified taxes. As partnerships are pass-through entities, profits (and losses) are taxed at a personal, rather than corporate, level. In certain circumstances, this can lower your overall tax bill.
In addition to these advantages, there are also several risks associated with general partnerships.
Disadvantages of a General Partnership in Texas
The potential downsides of a general partnership must always be weighed against the possible benefits. Two specific disadvantages include:
- Unlimited liability. Partners in a general partnership take on unlimited personal liability for the debts and liabilities of the business, as well as the actions of other partners. This level of liability typically makes general partnerships unsuitable for businesses running larger operations or risky activities. The risk also makes general partnerships unattractive to external investors.
- Bound by other partners' decisions. This liability also extends to the decisions of other partners. For example, if a partner enters into a contract with a certain supplier without your knowledge, you are still bound to honor the agreement.
Before entering into a general partnership, you should seek legal advice on the potential benefits and risks in your situation.