A partnership is an association of two or more people or entities that carry on as co-owners of a business for profit. Many people believe that formal paperwork is required to set up a business and begin, but this is not necessarily the case. A legal partnership in Texas may be created by written document, orally, or may be implied through the actions and conduct of two or more individuals and entities.
In Texas, the creation of a Partnership may be determined by the totality of facts and circumstances. Such circumstances are:
- Sharing ownership in property (tenancy in common, joint tenancy, tenancy by entireties)
- Sharing of gross income and debt obligations
- Sharing of profits
- The specific intent of each individual within the partnership
These factors must be taken into consideration to determine if there is in fact a legal partnership. It is advisable to engage an attorney to help create a written partnership agreement that sets out specifically the powers, rights, and duties vested in each partner before commencing operations in a new business.
Partnership statutes in Texas give broad flexibility for each partner to create a partnership agreement that best accommodates their interests and the relationship. A written partnership agreement is essential when going into business with another individual. The partnership will govern the nature of the relationship for all the partners and the power each has over the partnership. Without a partnership agreement, a partnership rights and duties will default to the discretion of Texas statutes.
There are a few key characteristics of partnership to keep in mind if you wish to establish a partnership in Texas. First, there is no personal liability protection when forming a partnership. Second, all of the partners may be subject to joint and several liability if sued. This means that if an individual sues a partner in the partnership but that partner has no money, then the individual may rightfully sue any of the other partners in that partnership to be compensated. Of course the lawsuit should be primarily directed at the partnership, but the important point is that all partners may be joined and will additionally be at risk for liability. Third, the profits and losses flow directly to the individual partners’ incomes. The partners directly receive the profits and losses. Fourth, a partnership itself does not pay taxes. Do not mistake a partnership with a corporation. A partnership will not have to pay a separate corporate tax which may be a tax benefit for a startup business.
It is important for each individual who wishes to start a partnership to sit down with a lawyer and create a detailed partnership agreement. This protects the interests of all the partners involved. The partnership agreement, if done correctly, should address any potential ambiguity and allocate specifically the rights and powers to each of the partners. It is hard at times for clients to foresee problems that could arise when co-owning a business as partners. This is why you should clearly set out each of the partners’ intentions, obligations, and rights in a written document that will govern the partnership terms.