This Partnership Agreement (TX General Partnership) template can be used to establish a general partnership in Texas under the Texas Business Organizations Code of 2006 that will be taxed as a partnership under the Internal Revenue Code. This template contains practical guidance, drafting notes, and optional and alternate clauses. There are many other models and variations of models of partnership agreements. A partnership taxed as a general partnership may elect to allocate items of income, gain, loss, and deductions among themselves in various ways. A general partnership may also be taxed as a partnership, a C corporation, or an S corporation for federal income tax purposes. This general partnership agreement template assumes that each partner will have an equal vote; that each partner will receive equal distributions prior to liquidation; and that, for federal income tax purposes, each partner generally will share equally in partnership income, gain, losses, and deductions. Upon liquidation, this model distributes the cash proceeds (after all debts are paid) in accordance with the positive balance of the partners' capital accounts, and requires restoration of any deficit capital account balances. A general partnership taxed as a partnership for federal income tax purposes may instead choose to specially allocate tax items among the partners (for example, all income, gain, losses, and deductions associated with manufacturing are allocated to Partner A, while all income, gain, losses, and deductions associated with distribution are allocated to Partner B). Special allocations will be respected for tax purposes, so long as they have "substantial economic effect." Treas. Reg. § 1.704-1(b)(2). Drafting special allocations requires language that is appropriate for the circumstance and an understanding of tax law. This template should not be used to draft special allocations of tax items. Instead of providing for tax allocations and cash distributions that follow tax allocations, a general partnership taxed as a partnership for federal income tax purposes may instead provide for how cash proceeds of a liquidation will be distributed, and direct for tax allocations to be made so that, upon liquidation, the partners' capital accounts will conform to the cash distribution scheme. These provisions are commonly referred to as targeted allocations and, while popular with the business community (primarily because they are easier to understand), the law concerning targeted allocations is still developing. This template should not be used to draft targeted allocations. This template also should not be used, or will need to be substantially revised, for a general partnership that elects to be taxed as a C corporation or as an S corporation for federal income tax purposes. If a general partnership elects to be taxed as a C corporation, taxable income will be determined at the corporate level, and there is no concept of a capital account or allocation of specific tax items among the partners. A partnership agreement for a general partnership of this type, therefore, would not provide for capital accounts or allocation of taxable income. A general partnership of this type also would not make distributions in the sense that a partnership makes distributions, but instead would pay dividends to the partners in proportion to their ownership interests. As with a C corporation, the taxable income of a general partnership that elects to be taxed as an S corporation will be determined at the corporate level. The partners in this type of general partnership will have their own capital accounts, similar to a partnership, but their capital accounts will be determined and maintained according to the rules set forth in I.R.C. § 1362 governing S corporation accounting, rather than I.R.C. § 704 governing partnership accounting. For further information, see Partnership Tax Audit Rules. See also Partnership and Other Pass-Through Entities Taxation and Partnership Tax Audit Clauses (Bipartisan Budget Act of 2015). For general information on general partnerships in Texas, see General Partnerships (TX).