Are you looking to run a business with one or more partners in the state of Texas?
The simplest way to do this is to form a Texas general partnership, which at its core is essentially just a handshake agreement between two (or more) people to operate a business together.
General partnerships are just one of several ways for multiple people to co-own a business, so in this guide we’ll describe how the general partnership compares to some other more formal business structures in Texas.
What Is a General Partnership?
At its core, the general partnership bears the most similarities with the sole proprietorship. Both are unincorporated business entities that are viewed as extensions of their owners as people, rather than as separate legal entities. General partnerships often don’t even have business names, as they can be operated using the owners’ personal names.
Let’s take a look at two of the most important differences between general partnerships and formal business entities:
1) Taxation and Signature Requirements
Due to the lack of legal distinction between the general partnership and its owners, the “pass-through” model of taxation applies to this type of company. This means that the profits and losses of a partnership are claimed on the owners’ personal tax returns. Along those same lines, general partnership owners can sign business contracts using their own names instead of signing on behalf of the company, and customers are also welcome to write checks to the owners personally.
2) No Asset Protection
The most important distinction between general partnerships and formal business structures like corporations or limited liability companies (LLCs) is the issue of personal asset protection. In a general partnership, if your business is sued, your creditors are free to pursue your personal assets, including but not limited to your house, car, and even the contents of your personal checking account.
On the other end of the spectrum, owners of LLCs and corporations enjoy limited liability protection, which means that for the most part, creditors can only go after business assets, and the personal assets of the ownership group are left intact.
How to Become a Texas General Partnership
If you want to start a general partnership in the state of Texas, there is no formal business registration process to complete.
To form a Texas general partnership, you simply need to start working with your partner or partners. In addition, unlike corporations or LLCs, there aren’t any formation fees or ongoing maintenance fees associated with filings like annual reports.
While the actual legal requirements are incredibly simple, there are still some other steps that you might want to take, depending on your preferences and your goals for the company. Let’s discuss the additional steps that may or may not suit your business needs.
If you don’t want to use your personal name as your official business name, you can acquire a doing business as (DBA) name from the state of Texas. With a DBA, you can use an assumed name in an official capacity, which is a great way to attract customers, as most people find that a business name adds legitimacy and professionalism to a business, as opposed to simply using the owners’ own names.
With a DBA, your general partnership can also open business bank accounts using the assumed name, which is another way to increase the professional aspect of your company. After all, it looks much better to have your company name on your checks, rather than just writing checks from your personal accounts.
Unlike many other states, Texas DBAs are not required to be distinguishable from other businesses on the state record. When you select a desired name, you can apply to use it by filing an Assumed Name Certificate (Form 503) with your local municipal clerk.
Do you want more information on DBA registration in Texas? Take a look at our full article on the subject.
Register for Taxes
Other than the fact that general partnerships have more than one owner, the other major difference between a sole proprietorship and a partnership is the fact that a general partnership needs to acquire a federal tax ID number, otherwise known as an EIN.
While sole proprietors can get away with just using their personal social security number, the partnership needs an EIN because ― even though partnerships do not file business tax returns ― it needs to file an annual information return with the IRS.
In addition to the EIN, your business may need to register for state or local taxes.
While Texas has a franchise tax that applies to most all businesses in the state, general partnerships with partners who are all natural persons rather than businesses are not required to pay it. When applicable franchise tax is taxed at the rate of around 1%.
Most of the taxes paid by Texas general partnerships will happen at the local level. For example, your business may be subject to a local sales tax. For more information on local and state taxes in Texas, you’ll need to visit the Texas Comptroller’s website located here.
Determine License and Permit Requirements
The state of Texas does not have a general business license that all general partnerships are required to obtain. However, depending on what industry you operate in, your business may need licenses or permits to enable you to run your company in a compliant fashion.
In an effort to maintain a business-friendly status, Texas has tried to minimize the number of business licenses required by the state. Most cities and towns dictate their own local licensing requirements, so you’ll need to consult your city’s local government or county clerk to determine your general partnership’s local licensing standards.
Further information on Texas business licenses and permits in general can be found by reading the Business Licenses & Permits Guide assembled by the Texas government or by consulting the state’s Business Permit Office.
The general partnership is a much simpler business for multiple owners than a corporation or a limited liability company.
The state of Texas doesn’t require any official formation for general partnerships, and they’re also not required to pay any formation fees or participate in ongoing maintenance filings like annual reports. However, the general partnership as a business structure has some serious weaknesses as well, like the lack of personal asset protection that leaves owners’ assets exposed to potential lawsuits.
We hope this article helped you determine whether you’d like to form a Texas general partnership, or if there’s another business type that would better suit your needs. As always, we wish you a successful business future!