What Are the Different Kinds of Partnerships?
When you establish a business with a partner, you have several options available for the corporate structure. Certain types of businesses are limited to certain types of business structures. For example, some states do not allow law practices to operate as a limited liability company. Even if you can form an LLC or corporation, you might have good reason to limit yourself to a partnership permanently or for the time being. If you intend to enter into a partnership, rather than form an LLC or a corporation, you still have several options for your business entity. Read on for a discussion of the different types of partnerships available in Illinois, and speak with a knowledgeable Chicago entity formation and business law firm for advice and assistance.
What Is a Partnership?
A partnership is a business entity in which two or more people agree to share responsibility for the management and profits (or losses) of the company. In Illinois, partnerships are governed by the Illinois Uniform Partnership Act of 1997 (“Partnership Act”), codified at 805 ILCS 206/100 et. seq., and the Illinois Uniform Limited Partnership Act of 2001 (“Limited Partnership Act”), codified at 805 ILCS 215/0.01 et. seq.
Partnerships can be formed either explicitly, with formal documentation, or informally via an agreement to carry on as co-owners of a business for profit. Someone who receives a share of the profits of a business is presumed to be a partner unless the profits were received in payment for a specified service.
Different business structures are generally divided according to how they are taxed, their level of formality, and whether they are treated as a separate entity from the owners for the purposes of liability. The different types of partnerships are all taxed as “pass-through” entities, meaning the partnership itself does not pay any taxes but the revenue earned is taxed to the owners on the owners’ personal income tax returns. Below are the various types of partnerships that can be formed in Illinois.
General Partnership
General partnerships (GP) have the lowest barrier to entry and the least amount of formalities required. There are very few rules about how the entity must be named or maintained. No state filing is required to form a GP. In a GP, all of the partners manage the company and are responsible for the GP’s debts and daily obligations. GPs must pay a 1.5% personal property replacement tax but no income tax. The main drawback of a GP is that a GP offers no liability protection, meaning each partner is personally liable for all of the company’s debts, and their personal assets can be seized to settle the GP’s debts.
Limited Partnership
Limited partnerships (LP) are similar to GPs but offer two levels of partners: limited partners and general partners. General partners are fully and personally liable for the company’s debts, just like in general partnerships, and are involved in day-to-day management. Typically, the limited partners are “silent” investors. Limited partners do not have any control over the company and do not manage the actual business operations. However, they do have limited liability–they are only liable for the amounts they’ve invested in the company. LPs are popular when companies want to attract outside investment so that they can offer the investor protection from the company’s obligations and liabilities.
Limited Liability Partnership
Limited liability partnerships (LLP) have a single class of partner similar to the general partnership structure but differ from a general partnership by protecting each partner from debts and liabilities incurred by the other partners. LLPs are limited to certain types of professional service providers such as law firms, accountants, or medical practices. The personal assets of LLP partners are generally shielded from liabilities incurred by the LLP.
Limited Liability Limited Partnership
A limited liability limited partnership (LLLP) is a hybrid of a Limited Partnership and a Limited Liability Partnership. An LLP has two separate tiers of partnership, like the Limited Partnership. Limited partners, again, are like silent investors, with no control over day-to-day business operations. In an LLLP, all partners, general and limited, are all protected from the debts and liabilities incurred by the other partners.
Talk to your business law attorney about your budding business to discuss which form of partnership makes the most sense for you.
Dedicated Illinois Entity Formation Lawyer Ready to Help You Through the Process
If you’re forming a business entity in Illinois, contact an entity formation lawyer who can offer the individualized guidance you need to make the decisions critical to the success of your enterprise. Call a diligent and experienced entity formation lawyer at MacDonald, Lee & Senechalle, Ltd. for a consultation, in Hoffman Estates at 847-310-0025, or in Des Plaines at 847-298-5030.