Texas does not tax partnership income; franchise tax applies to limited-liability entities but not general partnerships of natural persons

# Summary

Texas does not impose an income tax on partnerships or on a partner's distributive share. There is no Texas partnership income tax return, no composite return, no nonresident withholding on distributive shares, and no PTET election — with no individual income tax (constitutionally barred), there is nothing for such machinery to collect.

The entity-level exception is the franchise (margin) tax, and for partnerships it turns entirely on the form of the partnership. Limited partnerships, limited liability partnerships, and LLCs taxed as partnerships are "taxable entities" and file franchise reports. A true general partnership owned entirely by natural persons is not a taxable entity at all — the one business form (besides sole proprietorship) that escapes the franchise tax completely.

# The general-partnership carve-out, verbatim

Tex. Tax Code § 171.0002(b): "'Taxable entity' does not include: (1) a sole proprietorship; (2) a general partnership: (A) the direct ownership of which is entirely composed of natural persons; and (B) the liability of which is not limited under a statute of this state or another state, including by registration as a limited liability partnership; (3) a passive entity as defined by Section 171.0003 ..."

Both prongs matter. Admit an entity partner, or register as an LLP, and the partnership becomes a taxable entity for the franchise tax. Separately, § 171.0003 excludes qualifying passive entities (at least 90 percent passive income), which shelters many family and investment limited partnerships from the tax even though their form would otherwise be taxable.

# When the franchise tax does apply

A partnership that is a taxable entity (LP, LLP, LLC, or a general partnership with an entity partner or limited liability) computes margin tax like any other entity: 0.75 percent of taxable margin (0.375 percent for retail/wholesale), with no tax due at or below the $2.47 million annualized-revenue threshold for 2024-2025 reports ($2.65 million for 2026) and only an information report owed below it. Tiered-partnership elections under § 171.1015 allocate margin between tiers. None of this taxes the partner: the levy stays at the entity, and the partner's share arrives in the partner's hands free of Texas tax.