Texas Limited Partnerships
Limited partnerships are generally divided into two (2) types of entities: the limited partnership and the limited liability partnership. Both are taxed as partnerships by the Internal Revenue Service. This entity is required to make a filing with the Secretary of State of Texas and to pay the necessary fees to the Secretary of State of Texas. The difference between these entities is the requirement of the limited liability partnership to provide certain security with the State of Texas for the benefit of creditors.
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Filing with the Secretary of State of Texas
A Texas partnership requires two (2) filings with the Secretary of State of Texas: one which is the formation of the general partner and one which is the certificate of the limited partnership. This entity is complex and should not be used except in limited circumstances including without limitation fund-raising requirements and passive investment protection. Under these circumstances, the limited partnership provides flexibility and certain asset protection not provided by other entities.
Limited Use of the Texas Limited Partnership
The Texas limited partnership is complex and cumbersome. It has been used in the past to avoid legally the requirement to pay franchise tax, which amounted to 4.5% of the net earnings. In 2006, the Texas legislature enacted the margin tax, which replaced the franchise tax, and with this enactment, the limited partnership became taxed under the margin tax. The disadvantage of requiring the formation of two (2) entities, the burden of operating two (2) entities, and the related cost associated with this type of entity has reduced the benefit of forming limited partnerships in Texas. Again, it should be used only in limited circumstances.
Filing with the Internal Revenue Service
No additional filings with the Internal Revenue Service are required to avoid taxation at the company level and the individual level.
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