Waldron & Schneider

Disadvantages of a General Partnership

The Texas Business Organizations Code defines a partnership as “an association of two or more persons to carry on a business for profit.” Whether those individuals intend to create a partnership is immaterial for determining whether a partnership is formed. Because of this, business partners who decline to create an LLC or other formally recognized corporate entity with which to conduct their business can inadvertently enter into a partnership.

The partnership described above is considered a general partnership. This is not to be confused with a limited partnership, a different type of corporate entity which provides limited liability protection for limited partners who have a diminished role in business operations. General partnerships instead allow all partners control and management rights over the business, and resultingly require that the partners share in the liabilities of the general partnership.

With some narrow exceptions, pursuant to the Texas Business Organizations Code, in a general partnership, “all partners are jointly and severally liable for all obligations of the partnership.” This means that if a general partnership incurs a debt, the creditor can pick and choose the individual partner or partners they wish to recover the debt from. It would then be up to the partner chosen to seek reimbursement from the remaining partners.

Perhaps the easiest and most common alternative utilized to this is through an LLC. Unlike in a general partnership, if an LLC incurs a debt the individual members of the LLC remain protected from personal responsibility to cover the costs incurred by the LLC. This is also true for shareholders of corporations and limited partners within limited partnerships.

This is not to say that a general partnership does not have positive aspects. A general partnership is easier to establish than other entities, as no registration with the Texas Secretary of State is necessary. Further, general partnerships are flexible, as strict maintenance requirements such as those for a corporation are inapplicable. However, for the reasons mentioned above, this comes with the offset of increased individual risks. Because of this, it is advisable to consider these risks and establish appropriate corporate protection beforehand.

Waldron & Schneider’s team of transactional attorneys collectively has decades of experience establishing and maintaining a variety of corporate entities for our clients. Call our office today to speak with an attorney about how we can help establish your business in a structure which protects you.

 

This article and website are made available by Waldron & Schneider for educational purposes only and to give basic information and a general understanding of the law, not to provide specific legal advice. By using this website you understand that there is no attorney client relationship between you and Waldron & Schneider. The article and website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. For more information or questions you can contact us and one of our attorneys will be in touch soon.

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