Welcome to entry #3 of our business formation series—Selecting a Business Structure. Long time readers will remember that it is important to choose a business form while still in the planning phase of your business.
If you will recall from Selecting a Business Structure, a General Partnership (“GP”) is “created when two or more people associate to carry on a business for profit.” General Partnerships in Texas are governed by Chapter 152 of the Business Organizations Code.
—See General Partnerships —Tex. Bus. Org. Code Ch. 152
What is a GP?
A General Partnership is basically a Sole Proprietorship with a
partner. A GP usually operates in accordance with a partnership agreement, but there is no legal requirement that the agreement be in writing, and no Secretary of State filing requirement.
A partnership is defined as an association of two or more persons to carry on a business for profit as owners, regardless of whether the persons intend to create a partnership or the association is called a partnership, joint venture, or other name.
—See Partnership Defined —Tex. Bus. Org. Code § 152.051(b)
What is the Role of a Partner?
A partner has many rights and duties. For example, each partner has equal rights in the management and conduct of the business of a partnership. Additionally, each partner may use or possess partnership property only on behalf of the partnership.
—See Rights and Duties of Partner —Tex. Bus. Org. Code § 152.203
Further, a partner owes certain duties to the partnership and the other partners. The partner owes the other partner and the partnership a duty of loyalty and a duty of care. Further, the partner must discharge her duties to the partnership and to the other partner in good faith and in a manner the partner reasonably believes to be in the best interest of the partnership.
—See General Standards of Partner’s Conduct —Tex. Bus. Org. Code § 152.204
Why Choose GP?
The simple answer: It is quick, easy, and cheap, at first. As illustrated above, this is an easy form of business organization to find yourself unintentionally a part of. You need not intend to form a partnership, but if you and another person carry on a business for profit, you’ve unwittingly formed a partnership.
Additionally, a partnership continues to exist even after an event of withdrawal of a partner. The relationships between the remaining partners is affected, but the partnership can continue operating.
—See Effect of Event of Withdrawal on P’ship & Other Partners—Tex. Bus. Org. Code § 152.502
Why Should I Avoid GPs?
The biggest problem facing general partners is that they are personally subjected to liabilities inside and outside of the General Partnership. For example, the partner is liable to a partnership and the other partner for a breach of the partnership agreement or a violation of a duty to the partnership or the other partner (see above) that causes harm to the partnership the other partner.
—See Partner’s Liability to Partnership and Other Partners —Tex. Bus. Org. Code § 152.210
Generally, all partners are jointly and severally liable for all obligations of the partnership with few exceptions. Joint and several liability means that a plaintiff in a case can recover all of his damages from either one or all of the defendants. For example, if the jury assigned one partner 45% fault and the other partner 55% fault, the plaintiff may recover 100% from the partner that was only 45% at fault.
—See Nature of Partner’s Liability—Tex. Bus. Org. Code § 152.304
What About Insurance Protection?
Since a General Partnership does not protect your personal assets from liability, consider purchasing general liability insurance for your business. This extra expense could go a long way to ensuring you have some protections from liability. However, you will need to research each plan to find the best one for your business. Look for an insurance plan that will cover the majority of claims your type of business is likely to encounter.
What Else Should I Know?
If the partnership business is conducted under a name that does not include the surname of all the partners, then an assumed name certificate should be filed with the county clerk’s office in the county where a business premise is maintained. If the partnership does not have a maintained business premise, then an assumed name certificate should be filed in all counties where business is conducted under the assumed name.
You should check federal, state, and county or city laws for business license, general license, building permit, and zoning clearances that may apply to your business. Additionally, if you plan to hire employees, you will need to obtain an Employer Identification Number (EIN), which is the nine-digit number issued by the IRS for tax reporting purposes.
Your attorney can help you navigate the many requirements for any business organization form. She can also discuss the reasons for and against forming or continuing a General Partnership in more detail.
–Authored by Carrie A. Harris, Esq.,
Matthew Harris Law, PLLC – Business Law Division
1001 Main Street, Suite 200, Lubbock, Texas, 79401-3309
Tel: (806) 702-4852 | Fax: (800) 985-9479