A limited partnership is similar in many respects to a general partnership. In a limited partnership, however, there are two types of partners–general and limited. Texas law requires that a limited partnership have one or more general partners and one or more limited partners. The principal difference between a general and limited partner is that the limited partner can limit his or her personal liability for partnership debts to the amount personally invested in the partnership. The limited partner, in exchange for the reduction in liability, does not control or manage the business. The general partner controls and manages the business and is personally liable for partnership debts.
Because limited partnerships must meet the specific requirements of certain Texas statutes, they can be more complicated to establish. For example, a certificate of formation must be filed with the Secretary of State. Additionally, certain records must be kept, and there are specific requirements for a limited partnership’s business name. A limited partnership may engage in any lawful business unless it is limited by its partnership agreement or prohibited by another statute.
The benefits of a limited partnership depend on whether one is a general or a limited partner. The general partner enjoys control and management responsibilities. The limited partner receives limited personal liability. Profits for both types of partners are included on the partners’ individual tax returns and taxed at the individual taxpayer rate, which is lower than the rate charged to corporations.
The drawbacks of a limited partnership also depend on whether one is a general or limited partner. A general partner is personally responsible for the business debts, while the limited partner is only liable for debts up to the amount he or she invested in the partnership. The limited partner does not participate in the management or the control of the business. Business partners are treated like sole proprietors with regard to deducting benefits provided to themselves. Benefits like health, dental, and life insurance may generally not be deducted on partners’ federal income tax returns as business expenses (although some of these costs could possibly be deducted as adjustments to income).
Unlike a sole proprietorship or general partnership, when a limited partnership dissolves, a certificate of termination must be filed with the Texas Secretary of State in order to terminate the certificate of limited partnership. As mentioned previously, there are laws that apply specifically to limited partnerships that make this format more time-consuming and complex.
A limited partnership generally may continue after the death or departure of a partner. The departing partner (or his or her beneficiaries) may be entitled to the fair market value of the partnership interest. The beneficiaries also may have the option of becoming limited partners. A partner’s interest in a limited partnership may be assigned. However, the party receiving the assignment is only entitled to the profits that the assigning partner would have received. The partners generally may agree that the person receiving the assignment becomes a limited partner, but this legal requirement may be modified by a partnership agreement. A partnership agreement may detail the conditions of how a partnership interest may be sold, transferred, or handled upon the departure or death of a partner.