When you start a business, there are many decisions to make including the legal structure. The way that you structure the business is important, as it has a direct influence on liability, taxes, and many other legal details that are not always obvious. Often, businesses are not started by a single person, but two or more people. One of the most popular legal business frameworks is a partnership.
Types of Business Partnerships
In Texas, there are four types of business partnerships. The first, a general partnership, is the most basic. When you enter a general partnership, you and your partners are personally liable for all debts. With taxes, you account for general partnership income in the same way as any personal income, but general partnerships do not pay franchise taxes.
Next, there is a limited partnership. Under a limited partnership, there are both limited and general partners. Like a general partnership, the general partner is liable for all debts. Limited partners are only liable for the debts associated with their investments. Both partners account for income from the business, though the limited partner is only responsible for the income generated from their share of ownership. A limited partnership does pay franchise taxes.
Beyond a limited partnership, there is a limited liability partnership, or LLP. An LLP is usually used by businesses in fields with high liability risk and partners only have exposure to that portion of the business that they directly created. They are not held responsible for another partner's debts. Like a limited partnership, an LLP pays franchise taxes.
A joint venture is a special type of general partnership that normally only lasts long enough to execute a single transaction. Joint ventures are common in real estate and foreign market investments. Partners are fully liable for debts and report income just like a general partnership.
Common Partnership Disputes
Partnerships bring many advantages when forming a business relationship, but, as any business owner knows, things do not always go smoothly and disputes arise between partners all of the time. Here are a few of the common disputes seen in Texas business law.
Breach of Contract:
Perhaps the most common partnership dispute is breach of contract. Contracts, both verbal and written, create agreements between partners. You must take care when writing a partnership contract, and legal expertise is a must. Trust is natural between partners, and often they enter into a contract without the advice of an attorney. However, the best way to protect your partners and yourself from future litigation is by using independent legal review on all contract matters.
Breach of Fiduciary Duty:
Most business people enter into partnerships because they seek additional support. Partners rely on one another to help their business thrive. The failure of one partner to meet his or her commitment is a breach of fiduciary duty. Even beyond partner to partner, a breach of fiduciary duty occurs when a partner fails to meet an obligation to a client.
Violations of Non-compete Agreements: Many business partnerships use non-compete agreements to protect against unfair competition by taking knowledge gained with one business and using it at a competitor. Violating a non-compete agreement often causes litigation. Non-compete agreements are common when one partner "buys out" another. The partner buying the business restricts the selling partner from becoming a competitor by making a non-compete part of the sale.
Misuse of Trade Secrets: Many businesses rely on proprietary technology, processes, formulas, or other techniques that give them a market advantage. Obtaining this information without permission or using it after leaving a partnership is misuse of trade secrets.
Minority Owner Rights: Many partnerships are not equal. If one partner owns a larger portion of the business, other partners are minorities. While the major partner usually has a greater control over the company direction, minority owners are not without rights. If majority owners make decisions that violate those rights, the minority partners are able to seek legal recourse.
Embezzlement: Partners have access to funds that are often business restricted. Theft of those funds by one or more partners is embezzlement, which is a serious offense. Not only is embezzlement a reason for civil action, it is criminal as well and often results in jail time.
Partnerships help companies thrive, and remain a popular way to structure a business. They are not without problems, however, and disputes between partners often results in legal action. To help avoid disputes, you should employ independent legal expertise before entering into any business partnership. Using an attorney from the start will help your partnership and your business be more successful.