Deciding on a structure for your business is one of the most important decisions you will make. Each structure — sole proprietorship, general partnership, corporation, limited liability company, limited partnership, and limited liability partnership — comes with its own issues regarding taxation, liability, management, and transferability of ownership interest. Consulting with an experienced business lawyer is your best bet when determining which structure will suit your needs now and into the future.
This article focuses exclusively on the mechanics of forming a general partnership in Texas.
What Is a Texas General Partnership?
In a nutshell, a general partnership is a legal structure created by two or more persons for the purpose of carrying on a business for profit. Partners account for the income derived from the partnership — usually proportionate to their share of partnership ownership — just like they account for any other personal income. Each general partner has unlimited personal liability for all of the partnership debts. General partnerships are not subject to the Texas franchise tax.
What Are the Steps to Forming a General Partnership in Texas?
If you are forming a general partnership in Texas, there are certain steps you should take. Some steps are required under Texas law, while others are recommended as best business practices. These steps are:
- Choose a name for your partnership
- File an assumed business name when required
- Execute a written partnership agreement
- Obtain an Employer Identification Number
- Obtain all necessary legal papers, including professional and business licenses, permits, and zoning allowances
1. Choose a name for your partnership
Many Texas partnerships operate under the surnames of the partners. Others choose a fictitious name for their business. If you choose a fictitious name for your business, you will need to check to make sure that another registered business is not already using that name. You will also want to make sure that the name you choose doesn’t violate another company’s trademark and you will probably want to check to make sure that the internet domain for that name is available. You can do an internet domain search, as well as run searches on the Texas Comptroller’s website and the U.S. Patent & Trademark database to make sure your business name is not already in use.
2. File an assumed business name when required
If you decide to go with a fictitious name, the partnership will need to file a “doing business as” (DBA) certificate in the office of the clerk in the Texas county where the business is housed. If the business does not operate out of a single location, a DBA certificate — called an Assumed Name Certificate — must be filed in all Texas counties where the partners conduct business under the DBA name.
3. Execute a written partnership agreement
While there is no legal requirement in Texas that a partnership must operate pursuant to a written agreement, it is a highly recommended best practice. Creating and executing a written agreement will go a long way to making sure you and all of your partners are on the same page. By agreeing to how you will run the partnership and how certain situations will be managed in advance, you save a lot of time and reduce the potential for conflicts going forward.
While it is best to seek the advice and counsel of a business attorney when drafting a partnership agreement, you may want to think about drafting an agreement that answers the following questions:
- What will each partner’s contribution be to the enterprise?
- What level of decision-making authority will each partner have?
- Who will manage the business?
- What decisions must be decided by vote and what are the voting rules?
- How will profits, losses, and draws be determined and allocated?
- What happens if a partner voluntarily withdraws from the partnership?
- What happens if a partner dies?
- What happens if a partner files for bankruptcy?
- Will you admit new partners and, if so, how?
- What mechanisms will you employ for dispute resolution?
4. Apply for an Employer Identification Number
The IRS requires that partnerships obtain a nine-digit Employer Identification Number (EIN) for tax reporting purposes, regardless of whether or not they hire and pay employees. You can register for an EIN at the IRS website.
An EIN may also be required when registering your business for Texas tax reporting purposes. If you pay employees in Texas, you are required to register for an unemployment tax account under your EIN. A business attorney can advise you on how to comply with these types of reporting requirements.
5. Obtain all necessary legal papers, including professional and business licenses, permits, and zoning allowances
Depending on what type of Texas business you engage in, you may need to obtain business or professional licenses. You can look up permitting requirements on the Texas Occupational Licenses and Permits website. You may also need to look into local licensing requirements, as well as other local regulations covering building permits and zoning clearances that may apply to your business.
Additional General Partnership Business Considerations
Along with establishing your partnership and taking care of all of the legal documentation, licenses, and permits required to get your business up and running, there are still a few more tasks to complete:
- Open a bank account for the partnership. You can use your EIN to open up a dedicated bank account for your business. It is always best practice to keep your business and personal finances separate. This is especially important when you are operating under a partnership with other people.
- Set up a mechanism for reporting and paying taxes. While general partnerships are not subject to the Texas Franchise Tax, you may still be required to pay sales tax or use tax, depending upon what type of business you are in. The sooner you set up good systems to keep track of these taxes the better you will be able to meet your obligations on time.
- Get a good general liability insurance policy. You and your partners are personally liable for all of the debts and financial obligations of your partnership business. You should seriously consider getting a general liability insurance policy to protect the partners in your business from unforeseen circumstances such as a lawsuit or other type of claim.
Contact Kelly Legal Group For Help With Your Texas Partnership
Forming a new business partnership is exciting and challenging. It is important to make sure that you take all the right steps from the start. The Texas business lawyers at Kelly Legal Group are available to help guide you through the process so your new business venture is set up for success. To meet with one of our business attorneys, reach out to us online or call our Austin office at 512-505-0053.