Does a corporation owe Texas franchise tax just because it owns, or is affiliated with, a limited partner in a Texas limited partnership?

Plain-English summary

A group of Florida corporations was structured around a Texas limited partnership (LP) doing business in Texas. T (a Florida corporation) was the sole member of an LLC that was the limited partner in the LP, and possibly the 100% owner of GP (the LP's general partner); M (a Florida corporation) provided management and administrative services for the LP and GP in Texas. The taxpayer asked the Comptroller to rule that T and LLC were not subject to Texas franchise tax, given that — under Delaware law — a limited partner may take certain actions, and T's people might occasionally be present in Texas to do so.

The Comptroller would not flatly say T and LLC were free of the tax, and explained the boundaries:

1. Mere ownership of a limited-partner interest is not enough. "Merely owning a limited partnership interest in a limited partnership doing business in Texas is not sufficient to subject the limited partner to Texas franchise tax." But that protection "does not extend to having employees and agents of the limited partner or the owner of the limited partner in Texas" — so sending people into Texas can create nexus.
2. Naming the affiliates in promotional materials does not, by itself, create nexus, "if there is no solicitation for T or LLC in the promotional material."
3. Actions taken in Texas are governed by the same rule as point 1 — physical presence of employees/agents is the dividing line.
4. Stock ownership, control, and affiliation with GP, M, and LP will not subject T or LLC to franchise tax, provided they are "doing business somewhere other than Texas."

The unifying theme: for the pre-2008 franchise tax, a passive limited-partner interest and mere affiliation did not create Texas nexus, but the physical presence of employees or agents in Texas would.

What this means for you

Investors holding limited-partner interests

A passive limited-partner stake in a Texas partnership, and mere corporate affiliation, did not by themselves pull an out-of-state corporation into Texas franchise tax. The moment your people are in Texas doing the partnership's or the LP interest's work, that shield can drop. Track where your employees and agents actually go.

Groups with in-state management companies

Notice the structure here: the management company (M) operated in Texas and was treated separately from the passive owners. Putting the operational, in-Texas functions in one entity while owners stay outside Texas is the pattern the Comptroller was describing — but confirm current treatment, because the margin tax changed partnership taxation.

Accountants and tax professionals

This is a nexus letter, not a computation letter — it cites the "doing business" principle rather than a specific statute. The bright line is physical presence of employees/agents. Re-verify under current law, where partnerships are taxable entities and nexus standards have evolved.

Common questions

Q: Does owning a limited-partner interest in a Texas partnership create franchise-tax nexus?
A: Not by itself. The Comptroller said merely owning a limited-partnership interest in a Texas-active LP is not sufficient — but that does not cover having the limited partner's or its owner's employees and agents in Texas.

Q: Does naming an affiliate in the partnership's marketing create nexus?
A: No, not if there is no solicitation for that affiliate in the promotional material.

Q: Does controlling the general partner and management company create nexus?
A: Mere ownership, control, and affiliation will not, as long as those owners are doing business somewhere other than Texas.

Citations and references

This letter turned on the general "doing business" / nexus standard for the franchise tax rather than a specific cited statute or rule; the Comptroller declined to issue a blanket no-tax ruling and instead drew the line at the physical presence of employees or agents in Texas.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9907779L

Original ruling text

July 20, 1999

Dear **:

Thank you for your letter asking whether a corporation would have sufficient
nexus to be subject to Texas franchise tax.

You state that T (a Florida corporation) is the sole member of LLC (which is
the limited partner in LP, a limited partnership doing business in Texas) and,
possibly, 100% owner of GP (which is a Florida corporation that is the general
partner of LP). If T is not the 100% owner of GP, then LLC is. M (a Florida
corporation) provides management and administrative services for both LP and GP
in Texas and is a wholly-owned subsidiary of T or LLC.

You list actions a limited partner, under Delaware law, may take, and state
that T, because of its affiliation with LLC may take those actions on behalf of
GP or LP. Those actions may require employees and agents of T and/or LLC to be
present in Texas on a temporary basis.

1. You ask us to rule that T and LLC are not subject to Texas franchise tax.
   We can not state that they are not subject to Texas franchise tax. It is our
   position that merely owning a limited partnership interest in a limited
   partnership doing business in Texas is not sufficient to subject the limited
   partner to Texas franchise tax. This does not extend to having employees and
   agents of the limited partner or the owner of the limited partner in Texas.

2. You ask whether the use of T's or LLC's name and affiliation with LP in
   LP's promotional materials will subject T or LLC to Texas franchise tax. The
   mere mention of their name would not subject them to Texas franchise tax if
   there is no solicitation for T or LLC in the promotional material.

3. You ask if actions taken by T or LLC may subject them to Texas franchise
   tax. See answer to #1 above.

4. You ask if T's or LLC's stock ownership, control, and affiliation with GP,
   M, and LP will subject T and LLC to Texas franchise tax. Mere ownership of GP,
   M, and LP will not subject T or LLC to Texas franchise tax if they are doing
   business somewhere other than Texas.

This response is based on the facts presented in your letter. If the facts
change or if there are additional relevant facts, the response may change.

If you have any questions, please do not hesitate to write me or call me toll
free at 1-800-531-5441, extension 34662.

Sincerely,

Jerry Oxford
Tax Policy Division