Creating a Valid Limited Partnership in Texas

Few activities are as rewarding as setting up a new business when you’re ready to start selling your goods or services to the public. However, it’s important to understand the distinct benefits and drawbacks of the various business structures you can choose from. While some people prefer to run a sole proprietorship, others believe they’ll be better served by either creating a partnership, limited liability company or corporation. If you’re uncertain which structure may work best for you, it’s important to meet with your Houston business law attorney for early guidance and advice.

This article focuses on the formation of a Texas limited partnership (LP) and how its structure and requirements are unique compared to those of a limited liability partnership (LLP).

How Can Specific Business Structures Affect You & Your Company?

The structure you choose directly bears on the taxes your partnership may have to pay, the paperwork that must be filed with the state before you can begin transacting business, how you can raise money to finance your activities, and your own personal liability for debts owed by the partnership.

How Do Texas Limited Partnerships and Limited Liability Partnerships Differ?

One of the main distinctions between an LP and an LLP is that a limited partnership has only one general partner whose liability is unlimited – and all the other partners have limited liability. As might be expected, the partners assigned limited liability only have limited control over how the company or business is run.

A limited partnership is required to operate in keeping with its oral or written partnership agreement. As is true regarding most business matters, it’s always best to capture any agreement this important in written form. Although you do not have to file a copy of the partnership agreement with the state of Texas, you do need to provide a “certificate of formation” to the Texas Secretary of State’s Office.

Some businesses prefer to limit the general partners’ liability by creating a limited liability partnership (LLP). Those forming this type of business structure must provide the Secretary of State’s Office with a properly completed registration form.

Additional Key Facts You Should Know When Forming a Limited Partnership (LP)

  • Each LP is governed by Texas Business Organizations Code (BOC) Title 4, Chapters 151, 153 and 154. Specific details governing the contents of the required certificate of formation are set forth in the BOC Title 1, Chapter 3, Subchapter A;
  • Every LP will have one or more general partners – as well as one or more limited partners. In addition to individual people, partners can also be corporations, partnerships and other types of legal entities;
  • Taxation. Keep in mind that limited partnerships are subject to paying a franchise tax. You can learn more about your partnership’s tax status by contacting the Tax Assistance Section of the Texas Comptroller of Public Accounts. (Be sure to research other possible federal government tax issues by visiting the Internal Revenue Service website at www.irs.gov);
  • In your certificate of formation, your LP must provide the Secretary of State’s Office with a fully unique name for your partnership that’s distinctly different from any other one currently in existence;
  • A registered agent (who has fully consented to serve in this role) and a registered office must be set forth in your certificate;
  • The name (and address) of each general partner must be provided in your certificate. Every general partner must sign the certificate of formation.

While this is not intended to be a comprehensive listing of every requirement for properly filing an LP’s certificate of formation, it should clearly indicate that you must provide highly accurate and detailed information. Once the Texas Secretary of State files your certificate, your LP should become legally recognized. However, since certain questions may be raised about the certificate’s contents, it’s always best to have a lawyer help you fill it out and then review it before it’s filed.

Lawyers in our office are always available to help you determine the best formal structure for your business – and to help you file all required paperwork with the Texas Secretary of State’s Office.

Starting a New Business: Avoid These common Mistakes

Starting a New Business: Avoid These Common Mistakes

Few activities in life are more challenging and exciting than starting a new business. So, if you’re determined to succeed, always accept advice from those who’ve been where you are now and know what often works best. Careful early planning can pay you back many times over later when your properly marketed goods and services motivate satisfied customers to tell others about your unique offerings.

By making the hard choices described below during your start-up phase, you can avoid many errors that often prevent hard-working people with great ideas from carving out a highly profitable niche in today’s marketplace.

The Key Early Decisions New Business Owners Must Make

  • Choose your co-owners wisely. Always look beyond each person’s academic degrees and decide if their experience is strong enough to withstand the challenges of running a business. Clearly define each owner’s responsibilities and how you’ll regularly monitor each other’s performance. Consider requiring every major stakeholder to undergo professional personality testing so you’ll know if you can each offset the specific strengths and weaknesses of one another that high-stress situations often reveal.
  • Fully track all money being spent and coming in. Be sure to hire a competent, in-house accountant. Agree in writing how all funding will be spent.
  • Have your lawyers draft one or more standard form contracts that fully protect your company’s rights. They should be thorough, but not so burdensome or one-sided that customers will refuse to sign them.
  • Meet early on with your trustworthy Houston business law attorneys. Carefully listen as they describe the various business structures that might best suit your company and the different tax consequences that accompany each one. Learn all you can about the state and federal employment laws and regulations you must follow. Ask for help drawing up your first employee handbook (spelling out all employee benefits) and decide if your employees should all sign “at-will” employment offer letters. Obtain advice on choosing the best available name for your company. Inquire about having everyone sign NDAs (non-disclosure agreements) protecting company secrets. And learn all you can about properly handling sexual harassment issues and claims of discrimination;
  • Create a flexible business plan with reasonable goals. This should normally be drawn up after you’ve decided on your business structure (such as a “C” corporation or “LLC”) and created a written operating agreement that clearly defines all key partners’ general duties and responsibilities, financial contributions, and liabilities. Be sure everyone knows that added responsibilities may be added to each person’s assigned tasks as unexpected needs arise. You should also agree in writing whether you must obtain help through arbitration or mediation services when internal problems cannot be readily resolved;
  • Hire the best employees you can afford. Just as you need to choose co-founders with proven records of making ethical business decisions, you also need highly flexible employees who are told up front that they may need to “wear many hats” as new duties must be assigned.
  • Check out your competition ahead of time and properly fund adequate marketing of your goods and services. Never assume all your company’s offerings are completely unique. Fully handle all due diligence tasks in a timely manner so you can hopefully determine how your competitors have been successfully reaching the very customers you hope to win over. Be sure the market (or location) you’re targeting can handle all the current competition – and make adequate plans to distinguish your brand from all the others.

While the suggestions shared above should help you, always be ready to consult with others as you broaden your web of industry experts and colleagues. If you need to raise more capital for your business, keep in mind that it’s often wise to befriend employees at companies currently funded by the specific venture capitalists you hope to meet with in the future.

Always Place a High Value on Customer Feedback – Readily Making Changes as Needed

No matter how good your in-house experts may be, your customers can often offer you invaluable information about how you may need to periodically change specific products or services. You should also ask them for their ideas on how you might improve your marketing efforts. Consider offering fee discounts to current customers if they’ll undergo brief interviews about your company. You might also simply ask customers to complete brief online surveys about your products and services.

If you’ll meet regularly with your co-founders and openly discuss problems as soon as they arise, chances are your new business will succeed.