Welcome to entry #4 of our business formation series—Selecting a Business Structure. Long time readers will remember that some business structures offer protection from personal liability.
If you will recall from Selecting a Business Structure, a Limited Partnership (“LP”) is formed by two or more persons having one or more general partners and one or more limited partners. Also, an LP must file a certificate of formation with the Texas Secretary of State.
What is a Limited Partnership?
According to Texas law, an LP is a partnership that
is governed as a limited partnership under Title 4 of the Texas Business Organizations Code, and that has one or more general partners and one or more limited partners. An LP includes a limited partnership registered as a limited liability limited partnership.
—See Definitions—Tex. Bus. Org. Code § 1.002(50)
An LP is a filing entity, which means that it must file a certificate of formation with the Secretary of State to be a valid entity. To form a limited partnership, the partners must enter into a partnership agreement and file a certificate of formation. The certificate of formation must include the address of the principal office of the partnership in the United States where the records are kept or made available.
Additionally, each general partner must sign the certificate of formation. The certificate of formation must contain the name and address of each general partner.
—See Organizers—Tex.Bus. Org. Code § 3.004 & Certificate of Formation—Tex.Bus. Org. Code § 3.005
What is a General Partner?
A General Partner is a person who is admitted to an LP as a general partner in accordance with the LP’s governing documents.
—See Definitions—Tex. Bus. Org. Code § 1.002(33)(B)
A general partner has the rights and powers and is subject to the restrictions of a partnership without limited partners. He also has the liabilities of a partner in a partnership without limited partners. He is liable to the partnership and to the other partners.
—See General Powers and Liabilities of General Partner—Tex. Bus. Org. Code §153.152 & General Partnership Blog
A general partner may make contribution to, be allocated profits and losses of, and receive a distribution from the LP.
—See Contributions by and Distributions to General Partner—Tex. Bus. Org. Code §153.154
A general partner is one who controls the business, but is also liable for any debts. The general partner has the power, but also the risk.
What is a Limited Partner?
A Limited Partner is a person who has been admitted to an LP as a limited partner as provided by Chapter 153 of the Texas Business Organizations Code.
—See Definitions—Tex. Bus. Org. Code § 1.002(49)(A)
A limited partner is not liable for the obligations of an LP unless he is also a general partner, or in addition to the exercise of his rights and powers as a limited partner, he participates in the control of the business. If the limited partner participates in the control of the business, he is liable only to a person who transacts business with the LP reasonably believing, based on the limited partner’s conduct, that he is a general partner.
—See Liability to Third Parties—Tex. Bus. Org. Code §153.102
Why Choose a Limited Partnership?
The LP originated as a mix between a general partnership and a corporation. An LP is good choice for the business owner who likes the limited liability aspect attributable to the limited partners, and the central control aspect of a corporation attributable to the general partners.
Why Should I Avoid Limited Partnerships?
If you are looking for the control aspect of a general partner, you could go with a general partnership instead, which is much easier to form. If you like the limited liability aspect of the limited partners, you could choose a limited liability company, which offers limited liability to all members.
There are better options available that make the best of both worlds without the complicated structure.
What Else Should I Know?
The rights and obligations of general partners and limited partners are voluminous and complicated. If you choose this structure, be sure to structure your partnership before you file the certificate of formation.
Be sure to speak with your Business Law Attorney if you have concerns about forming a Limited Partnership.
–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