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North Houston Attorneys The Law Offices of Smith & Garg, Attorneys at Law

Conroe Business Lawyer

Smith & Garg - Conroe Business Lawyers Helping Partners Succeed

If you're involved in a partnership, then you understand that even if you unconditionally trust your partner or partners, you still have reservations in regards to certain issues. Perhaps there are a few wrinkles in your partnership agreement that have yet to be worked out, or perhaps you're concerned about the long-term viability of one or more of your partners.

PARTNERSHIPS

A partnership, as defined by the Texas Revised Partnership Act (TRPA), is an association of two or more individuals with the intent to carry on a business as co-owners for profit. There is no requirement that the parties subjectively intend to form a partnership, but only that they have a common goal to run a business together as co-owners. A partnership is considered to be a separate entity distinct from the partners themselves. Essentially, the implication of such is that real or personal property can be purchased in the partnership name, or a partnership can sue and be sued in the partnership name. Due to the fact that that a partnership results from agreement, contract law governs the formalities with regards to formation. The partnership agreement may be express or implied by the conduct of the parties, as it is not essential for the agreement to be in writing.

With regards to civil liability, such as contractual or tortuous liability, partners will be liable on contracts made by partners, which were made during the scope of business. Partners will also be liable for any torts committed by a partner or by an employee of the partnership in the course of business or with the partnership's authority. Liability will be extended to cover frauds committed by a copartner in the course of business, even though the other partners have no connection with, knowledge of, or participation in the fraud. Each and every partner is jointly and severally liable for any and all obligations of the partnership. This means that an action may be filed against one or more of the partners of or the partnership itself. With regards to criminal liability, all partners will not be criminally responsible for the criminal acts of one partner, unless the other partners participated or assisted in the commission of the crime.

A partnership is not a taxable entity. Instead, the partners file an individual return, and pay their share of the partnership income. However, although the partnership is not required to pay income tax, it does have to file what is called an annual information return. The partnerships' taxable income is calculated the same way an individual return is calculated. The key distinction is that the partnership is not allowed to take itemized individual deductions, charitable deductions, capital loss, etc. The individuals that make up the partnership can claim such items on their individual returns.

There are two categories of events that can lead to the termination of the partnership: (1) events of withdrawal of a partner or partners; and (2) events that require the winding up the partnership. Some examples of the first category would be if a partner gives written notice of his/her express will to withdraw, or one of the partners dies, or one of the partners becomes a debtor in bankruptcy. Some examples of the second category would be if the occurrence of an event which makes it illegal to carry on or substantially all of the partnership business, or the sale of all or substantially all the partnership assets.

LIMITED LIABILITY PARTNERSHIPS (LLP)

LLP stands for limited liability partnership, which is a creation of the Texas legislature. The major benefit of operating as an LLP is that the partners are not personally liable for the negligent acts of other partners or partnership employees. Another benefit of operating as an LLP is that the partners are not personally liable for the contractual obligations of the LLP. To become an LLP, an application must be filed with the secretary of state along with a statutory fee which is calculated on a per partner basis. The application must include the name of the LLP, the address of its principal office, its federal tax identification, the number of partners, and a brief statement of the type of business that the LLP is going to be conducting. Registration is effective for one year and must be renewed annually. An LLP must include the words "registered limited liability partnership" or the abbreviation in the actual title or name of the partnership, in order to put third parties on notice that the liability of the partners could be restricted under certain circumstances.

LIMITED PARTNERSHIPS

A limited partnership consists of one or more general partners and one or more limited partners. This type of partnership differs from a general partnership in two distinctive ways: (1) a limited partnership was unknown at common law and evolved through specific statutory authority; and (2) the liability of a limited partner for partnership debts is generally limited to the investment that he/she contributed to the partnership. The governing body of law for the state of Texas and almost all other states in dealing with this type of partnership/entity is called the Revised Uniform Limited Partnership Act of 1975, also known as RULPA. The RULPA is the primary resource with regards to all issues dealing with limited partnerships. However, where the RULPA does not provide an applicable rule, the courts fall back on the TRPA.

As far as procedural requirements in forming this type of entity, a certificate of limited partnership must be filed with the secretary of state and must set forth the following: (1) the partnership name, (2) the name and address of the agent for service of process, and (3) the name and address of each general partner (the limited partners' names need not be included). It is imperative that the certificate be signed by all general partners. Also, it is very important that the partnership title not contain the name(s) of a limited partner(s) unless it is also the name of a general partner, or the partnership business had been carried on under that title before the limited partner became a limited partner. Additionally, the title of the limited partnership must contain the words "limited partnership" or the abbreviation "L.P." or "Ltd.".

With regards to general liability, except as provided by statute or in the partnership agreement, a general partner of a limited partnership is subject to all of the liabilities of a partner in a general partnership. Therefore, a general partner is personally liable for the limited partnership's obligations. However, general partners can limit their liability in almost all situations by forming a limited liability limited partnership. On the other hand, as a general rule, a limited partner is not liable beyond his/her investment for obligations of the limited partnership. Thus, in an lawsuit by or against the limited partnership, the general partners are the only necessary parties. There are three exceptions to the general rule. First, a limited partner is liable to any creditor of the limited partnership if the limited partner is also a general partner. Second, a limited partner is liable as a general partner if he/she participates in the control of the business and the person dealing with the limited partnership reasonably believes, based on the limited partner's conduct, that the limited partner is a general partner. Third, a limited partner who knowingly permits his/her name to be used in the title of the limited partnership is liable to creditors who have no actual knowledge that he/she is not a general partner.

Partnership Issues to Consider

There are clearly too many potential partnership issues to list in one place, but potential issues can arise, and a Conroe business lawyer could be needed, at any step in the process. Before you even get started, you need to be sure that you have a sound partnership agreement in place. This is a surprisingly common omission, and one that can lead to disastrously antagonistic situations that can ruin a business.

Aside from the partnership agreement, you will also need the help of an experienced Conroe business lawyer to make sure that you have an operating agreement in place as well. This "catch-all" agreement will clarify the issues of what will happen at the office on an everyday basis. You need to define:

  • Your respective duties;
  • Your responsibilities;
  • Your respective salaries and bonuses;
  • Your decision-making process;
  • Any veto power that's necessary.

If you are concerned or just have questions about the structure of your business, you need to contact a Conroe business lawyer at Smith & Garg today to schedule a consultation.

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