A limited partnership must be created by filing a certificate of formation. It requires at least one general and one limited partner. There is limited liability for limited partners, but no limited liability for general partners. Limited partners are prohibited from participating in control. If a limited partner does participate in the control of the partnership, that partner risks losing the limited liability afforded to limited partners.
Limited partnerships are governed by Texas Business Organizations Code Chapter 153. A Certificate of Formation must be filed with the Texas Secretary of State. A limited partnership must have a partnership agreement. With limited exceptions, the parties are free to agree to whatever terms and conditions they desire. General partners owe a duty of care and duty of loyalty to other partners. Limited partners, however, do not owe these duties.
For a limited partnership, the liability of partners depends on whether the person is a general partner or a limited partner. A general partner has the right to participate in the control of the business just as if it were organized as a general partnership. But a general partner has no limited liability and are treated the same as a partner of a general partnership. On the other hand, a limited partner’s liability for the partnership debts or obligations is limited to that limited partner’s contribution to the partnership.
A limited partner will lose this limited liability if he or she participates in the control of the business, as discussed above. The issue of whether a limited partner participated in control is a factual question, which must be determined on a case-by-case basis. By statute, there are certain activities that do not, alone, constitute participating in control. These include: acting as a contractor or agent of the limited partnership, serving as an officer, director, agent, or member of any entity serving as a general partner, consulting or advising the general partner, acting as a surety or guarantor of the limited partnership, involvement with meetings of the partners, or voting on a number of matters.
Absent an agreement otherwise, partnership profits and losses are shared by each partner based on the current percentage interest in the partnership records or, if no such records exist, in proportion to their capital accounts.
A limited partnership is a “pass-through entity” for tax purposes. Although a partnership is a legal entity separate from the individual partners, partnerships are not taxed at the entity level, meaning that each member is responsible for paying the income taxes of the limited partnership.
If you need to talk to a Waco business attorney about your limited partnership, please call us at 254-753-6437.
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