Does owning an interest in — or being a partner in — a partnership that does business in Texas make a corporation 'doing business' in Texas for franchise tax?

Plain-English summary

A taxpayer asked the Comptroller a narrow question: does the Texas franchise tax statute define "conducting business" to include acting as a partner in, or owning an interest in, a partnership that does business in Texas?

The Comptroller answered:

1. The statute is silent. The franchise tax statute itself does not address whether owning a partnership interest counts as doing business.
2. By rule, a partner in a general partnership is doing business here. A corporation is considered doing business in Texas if it is a partner in a general partnership doing business in Texas.
3. A general partner of a limited partnership is doing business here. If a corporation is the general partner of a limited partnership, it is considered doing business in Texas if that limited partnership is doing business in Texas.
4. A limited partner is not — if that's its only Texas tie. A corporation that is only a limited partner in a limited partnership is not treated as doing business in Texas if its sole connection to the state is through that limited partnership.

Important currency note: This 1997 letter applies the franchise tax before the 2008 margin-tax overhaul, and STAR's subject line flags that the limited-partner entity involved became subject to the franchise tax effective January 1, 2008. The 2007 legislation restructured the tax into the current margin tax and made partnerships taxable, so the "limited partner not doing business" conclusion is historical — confirm current law.

What this means for you

Businesses holding partnership interests

The dividing line was general vs. limited: a general-partner corporation took on the partnership's Texas activity, while a purely limited-partner corporation did not. That let investors hold Texas-active partnerships at arm's length without creating franchise-tax nexus — but the margin tax has since made partnerships themselves taxable, so re-check.

Accountants and tax professionals

Note the Comptroller's own framing: the result came from rule, not the statute, which was silent. Under the current margin tax the analysis is different — partnerships are taxable entities — so use this only for the pre-2008 framework.

Common questions

Q: Does simply owning a limited partnership interest make a corporation "doing business" in Texas?
A: No — not if the limited partnership interest is the corporation's only connection to Texas.

Q: What about being a general partner?
A: A general partner (of either a general or limited partnership) is considered doing business in Texas if the partnership is doing business in Texas.

Q: Did this come from the statute?
A: No. The Comptroller said the statute is silent; the treatment comes from its rules.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9708345L

Original ruling text

August 21, 1997

Dear Mr. **:

On August 14, 1997, you inquired as to whether our statute defined conducting
business for tax purposes as including acting as a partner or owning an
interest in a partnership that conducts business in Texas.

The answer is "no." Our statute is silent regarding this. However, by rule, we
have set out that a corporation is considered doing business in Texas if it is
a partner in a general partnership doing business in Texas.

If the corporation is the general partner in a limited partnership, it is
considered doing business in Texas if the limited partnership is doing business
in Texas. We have not considered corporations that are limited partners in a
limited partnership as doing business in Texas if the only connection with
Texas is through the limited partnership which is doing business in Texas.

I hope this answers your questions.

Sincerely,

Wade Anderson
Director, Tax Policy

cc: Teresa Comer, Tax Policy