Texas General Partnerships, LLPs, and Personal Liability for Partnership Taxes

Texas does not require paperwork to form a general partnership. Two or more people running a business for profit as co-owners can be partners under Texas law without ever signing anything. Plenty of DFW businesses start that way: a contracting crew, a food truck, a consulting practice.

The problem shows up when the business falls behind with the IRS, usually on payroll taxes. Partners discover that the partnership's federal tax debt is their personal debt, all of it, and that the IRS can collect it from their homes, bank accounts, and paychecks.

Texas law: general partners are liable for partnership debts

As general information, Texas Business Organizations Code section 152.304 provides that, unless otherwise agreed by the claimant or provided by law, all partners are jointly and severally liable for all obligations of the partnership. Other provisions govern when a creditor may proceed against a partner's own assets, generally after pursuing the partnership. Questions about how those Texas rules apply to your partnership belong with a Texas attorney who practices in that area.

The point for tax purposes is simpler: under Texas law, a general partner is personally on the hook for partnership debts. Federal tax debts are partnership debts.

Federal law: Galletti

In United States v. Galletti, 541 U.S. 114 (2004), the Supreme Court addressed a partnership that failed to pay its employment taxes. The IRS assessed the partnership but not the individual partners. The partners argued the IRS could not collect from them without assessing them separately.

The Court disagreed. A timely assessment against the partnership allowed the IRS to collect from the general partners, who were liable for the debt under state law. The IRS's own lien manual, IRM 5.17.2, describes the holding the same way: because partners are derivatively liable under state law, the assessment and notice and demand on the partnership gave rise to a federal tax lien on both partnership and partner property.

That matters for the collection statute too. The ten-year collection period for the partners runs from the partnership's assessment, and the IRS can bring suit to collect from partners within that period.

Which partnership taxes are at stake

A partnership generally does not pay federal income tax; income flows through to partners on Schedule K-1, and each partner owes tax on their share personally anyway. The partnership-level debts that cause trouble are:

• Employment taxes. Withheld income tax, Social Security, and Medicare from employees' wages, plus the employer share, reported on Form 941, and FUTA on Form 940.
• Late-filing penalties. The IRC 6698 penalty for a late Form 1065, assessed per partner, per month.
• Imputed underpayments under the centralized partnership audit regime. For tax years from 2018, a partnership audit can result in an imputed underpayment the partnership itself pays, unless an election pushes the adjustment out to the partners.
• Excise taxes for certain businesses.

For withheld trust fund taxes, partners face two separate routes to personal liability: as general partners under Galletti, and as responsible persons under the trust fund recovery penalty. The partnership route reaches the full balance, including the employer's share, penalties, and interest.

The LLP shield, and why registration matters

Texas lets a general partnership register as a limited liability partnership with the Texas Secretary of State. As general information, Business Organizations Code section 152.801 provides that a partner in an LLP is generally not personally liable for partnership obligations incurred while the partnership is an LLP. Registration has to be kept current.

Because Galletti turns on state law, the LLP shield matters for federal tax collection. If state law does not make a partner liable for a partnership debt, there is no derivative liability for the IRS to collect. The IRS manual says the same thing for LLC members, citing Rev. Rul. 2004-41: if state law does not make members liable for the entity's debts, the IRS generally cannot collect the entity's federal taxes from them.

Timing is everything. Debts incurred before LLP registration, or after it lapses, may not be covered. Check the dates on the Secretary of State's records against the tax periods involved. The responsible person route under the trust fund recovery penalty remains available against individuals regardless of the shield.

Limited partners and LLC members

A Texas limited partnership has at least one general partner, who is personally liable, and limited partners, who generally are not unless they participate in control in ways the statute does not protect. Many Texas LPs use an LLC as the general partner precisely so no individual is a general partner.

An LLC taxed as a partnership is different again. Its members are generally not liable for the company's debts under Texas law, so Galletti-style collection does not apply to them. My guide on Texas LLC charging orders and the IRS covers both directions of LLC liability.

What partners should do now

If your partnership owes the IRS, assume every general partner is personally exposed until proven otherwise. Pull the partnership's account transcripts for every tax period. Confirm the entity's form and its registration history. Identify which debts are trust fund taxes.

Then deal with it as a group if you can. Partners who point fingers at each other often end up paying more, because the IRS can collect the full amount from whoever is easiest to reach. A partnership-level installment agreement or offer, combined with current compliance going forward, is usually better than every partner fending for themselves.

If you are starting a business with someone, form an entity on purpose. A handshake partnership is the most expensive free entity in Texas. My payroll tax guide for Dallas businesses covers the bigger picture, and the firm's payroll tax page explains the options. Let's talk: 813-229-7100.