Limited Partnerships

Limited partnerships date from an 1846 statute, which was substantially amended in 1937. In 1955, Texas adopted the Uniform Limited Partnership Act (adopted in some jurisdictions as early as 1917). The present law, the Revised Uniform Limited Partnership Act, with a fair number of revisions, many of which are based on Delaware’s law, was adopted in 1987. The statute was drafted by the Partnership Law Committee of the Section on Business Law of the State Bar of Texas.

No Liability Shield for General Partners

    All the general partners in a limited partnership are exposed to unlimited liability for the debts of the partnership. Each general partner is exposed to claims based upon the actions, or omissions, of the other general partners. While significant asset protection can be obtained by using a limited partnership with a limited liability company as a general partner, limited partnerships are considered less effective for limiting liability than corporations or limited liability companies. However, the limited partnership can come close to eliminating even general partner liability by electing "limited liability" status, and thus be a limited liability limited partnership. For more on this "limited liability" status, see Limited Liability Partnerships (LLPs).

No Double Taxation

    As with S corporations, a significant advantage of the partnership form of doing business is the freedom from the double taxation that applies to C corporations. Avoiding double taxation can be important if the business earns substantial income. Earnings of the entity when it is a limited partnership can be distributed without the Medicaid tax to the holders of limited partner interests. 

Great Flexibility in Terms of Ownership and Capital Structure

    Unlike S corporations, limited partnerships offer great flexibility in terms of ownership and capital structure. There are no partnership counterparts to the S corporation limitations on number and type of shareholders and one class of stock rule. Thus, when the advantage of pass-through taxation is critical, and the entity cannot qualify for S corporation status, the remaining options are an entity taxed under the partnership provisions.

Tax Advantages Not Available to S Corporation Shareholders

    Compared to S corporations, partnerships offer the additional tax advantages of:

1. partner basis includes partnership debt (including non-recourse debt),
2. the ability to step up the basis of partnership assets upon the sale or exchange of a partnership interest,
3. greater opportunities for partners to make tax-free contributions of appreciated property or property burdened with debt and to receive tax-free distributions of appreciated property, and
4. the ability to make special allocations of tax items to the partners.

Lack of Tax-Advantaged Fringe Benefits

    Partnerships do not compare favorably to C corporations regarding fringe benefits. For small businesses, the inability to offer tax-advantaged accident and health insurance benefits to partners can be a significant negative factor (This is a disadvantage of S corporation status as well because the same fringe benefit tax rules apply to both partners and employee-owners of S corporations.)

No Franchise Tax to Pay

    Partnerships do not pay the Texas franchise tax of 4.5% of earnings, that corporations and limited liability companies do pay.

This memorandum contains general information and while the information presented is accurate as of the date of its publication, it cannot be relied upon as legal advice, as that can only be obtained through personal consultation with an attorney with whom you share your specific facts.

 Copyright © 2005 by Sterling A. Minor. All Rights Reserved.

Last Updated: May 17, 2005
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