Do you want to form a limited partnership (LP) in Texas, but you’re not familiar with the formation process?
A limited partnership can be a great alternative to a general partnership, but the LP is definitely more difficult to form compared to the more casual nature of the general partnership. In this guide, we’ll discuss all the crucial details of forming this business type in Texas.
There are several significant differences between the general partnership and the limited partnership (LP), starting with the roles of the partners themselves. With a general partnership, the partners split profits evenly and take equal responsibility when it comes to liability ― general partners are personally liable for the company’s debts and settlements.
With a limited partnership (not to be confused with the LLC), there is at least one general partner and one limited partner, which is the term for a partner that does not have managerial responsibilities, and their liability is limited to the amount of money they invested in the partnership.
Sometimes, you’ll hear limited partners referred to as “silent partners” due to their lack of direct involvement in the day-to-day operations of the company.
Another major difference is that the general partnership is not a formal business structure, which means you don’t even need to file formation documents with the state of Texas, or pay any sort of formation fee. The general partnership is simply formed when the partners begin transacting business together.
On the other hand, a limited partnership does have a formal formation process with the Texas state government, and there is also a formation fee involved.
Whereas the state of Texas allows general partnerships to operate under the individual names of the partners, that is not the case for limited partnerships, which must have a distinct business name.
Your limited partnership’s name is often the first impression you get to make on potential customers, and therefore it goes without saying that this is an important step. There are a few different aspects to take into consideration when selecting a name for your business:
In Texas, all limited partnership names are required to include the words “limited,” “limited partnership,” or some other abbreviation of the word. In addition, you cannot include any words that refer to other business types (like “corporation” or “incorporated”), and you also can’t use words that are typically used to refer to specific kinds of businesses (like “bank” or “law office”).
Another aspect to consider is including language that explains what your business does ― for example, if you’re a realtor, put the phrase “real estate” in your LP name. Additionally, if your business has strong values like being environmentally friendly, you can indicate that by including the word “green.”
At the end of the day, this is your business, and you should choose a name that makes you proud. You should also make sure your limited partnership’s name both sounds good when spoken out loud, and looks good when written down.
The most important consideration for naming an LP is to not get too attached to any one business name until you have either reserved the name with the state of Texas, or you’ve officially formed your business.
Before reserving a name, you’ll first want to make sure it is available for use by consulting with the Texas Secretary of State. When you confirm the name availability, you may reserve it by filing an Application for Reservation of an Entity Name (Form 501). This can be done through mail or online through SOSDirect.
Every limited partnership in Texas is required to designate a registered agent, which is the individual or registered agent service that receives government correspondence on behalf of your business, then forwards those documents to you.
According to the Texas Secretary of State,
The registered agent can be either (option A) a domestic entity or a foreign entity that is registered to do business in Texas or (option B) an individual resident of the state. The limited partnership cannot act as its own registered agent; do not enter the limited partnership name as the name of the registered agent.”
Without a registered agent in Texas, you could lose your good standing and the state also has the right to dissolve your LP if they decide to. In a worst-case scenario, the state could fail to alert you regarding a lawsuit against your company, which could even lead to a judgment against your business because you didn’t defend yourself.
At the end of the day, we recommend designating a registered agent service to handle these requirements. Doing so will help eliminate junk mail and more importantly, keep your personal and/or business address off public record.
At this point, it’s time to legally form your new limited partnership.
This is done by filing a Certificate of Formation with the Texas Secretary of State. Completing the document will require the following information:
You may print and complete the Certificate of Formation to establish an LP as a PDF here. After completion, you’ll want to submit it via mail to the Texas Secretary of State. If you’d like to submit it online, do so through SOSDirect.
Cost to Form an LP: The state of Texas charges a filing fee of $750 to form a limited partnership.
Processing Time: There is no explicitly stated processing time for the Certificate of Formation document; inquiries regarding processing times may be directed to the Texas Secretary of State.
While not legally required by the state of Texas, a limited partnership agreement outlines some of the key operating principles of the business. Even though you don’t have to submit it to the state to form your LP, it’s still a vital document that describes the exact nature of the agreement between the general partners and limited partners.
The information included in a limited partnership agreement does vary depending on the nature of your business, the size of your company, and some other variables. In general, it’s good to get the following information down in writing:
Limited partnerships require a federal tax ID number, or EIN. An EIN is basically the business version of a social security number, and it’s used for a variety of important LP functions.
For instance, you’ll need an EIN if you want to hire any employees, and many banks require them to open business bank accounts as well. You’ll also need one for tax purposes, hence the name federal tax ID number. Get an EIN for your LP for free through the IRS.
In Texas, there is no corporate income tax or individual state income tax. In general, this makes state-level taxes in Texas relatively simple. Instead, there is a business franchise tax which your limited partnership will likely be required to pay. It is usually taxed at a rate of 1% or less.
While state-level taxes may be quite straightforward for your limited partnership, there are other local taxation requirements your business may need to meet. For information on local taxes and state-level taxes in general, visit the Texas Comptroller’s website here. Information on the page can help you determine your local sales tax payments and other tax liabilities.
Depending on where in Texas your business is located, you may also need to pay local taxes.
The most common local tax imposed by local taxing jurisdictions is sales tax and property tax. To check your municipality’s taxes, visit the local government website’s tax page of the city or county in which your limited partnership operates.
The state of Texas does not have a general business license that covers all business entities. However, depending on the nature of your business you may need to apply for several industry and location-specific licenses.
Most licensing in the state of Texas happens at a city or county level rather than a state level. To discover your municipality’s licensing needs, consult the licensing page of the local government in which your limited partnership operates.
To assist with your licensing needs, you may choose to consult the state’s licensing and permits page for a complete list of federal licenses and permits which may apply to your business entity. The Business Permit Office (BPO) also provides a Texas Business Licenses & Permits Guide which may be helpful in determining your company’s licensing needs.
If you would rather have a professional take care of your formation paperwork for you, you have a couple of options. The less expensive choice is to hire a business formation service to create your limited partnership.
While some service providers stick to less complicated business entities like limited liability companies, some also provide LP formations ― namely, LegalZoom and BizFilings. Currently ZenBusiness does not have this offering but does have regular LLC formation and business incorporation.
If you want the maximum possible degree of expertise, you should also consider hiring a business attorney to form your limited partnership. This is certainly a more expensive route, but if you want the peace of mind that every step is completed correctly ― and that all of your options have been thoroughly explored ― hiring a lawyer is a great option.
We highly recommend that you establish a business bank account so that your business and personal finances are maintained separately. This is important because it helps protect your personal assets, and also makes filing taxes much easier. Once you receive your EIN from the IRS, you’ll be able to use it to establish an account at the bank or credit union of your choice.
Unlike some other states, employers are not required to carry workers’ compensation insurance in Texas. For small businesses, the offering of health insurance is also optional. However, if your Texas limited partnership has any employees, it will likely be required to pay for unemployment insurance. This is done in the form of a tax, which you must register for by making an unemployment tax account with the state’s Unemployment Tax Registration System. After you obtain these legally required policies, it’s probably also a good idea to pursue general liability insurance, as well as some industry-specific policies.
Limited partnerships do not file business tax returns. Instead, the income is passed through the business entity to the partners, who then claim their share of profits or losses on their personal tax returns. Still, LPs do need to file an annual information return with the IRS, in which you report your business income, deductions, gains, and losses for the year.
Only certain types of business entities are required to file annual reports in Texas. Limited partnerships which are subject to state franchise tax laws are required to file annually with the Comptroller of Public Accounts. If your limited partnership is not subject to state franchise tax, you will be required to file a periodic report at the request of the Secretary of State. However, this request will not happen more than once every four years.
We don’t recommend that you attempt to manage your business finances without the help of a professional. There is too much room for error, and a professional can ultimately save you time and money by guiding you on how to manage your business finances. At a minimum, enlist professional help to set you up with software and the steps for keeping up with your finances on a regular basis. Then, consult back with your accountant at least a couple of times per year – and especially at tax time – to ensure you’re keeping track of everything correctly.
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