In this article, we will explain Illinois partnerships, including, “what is the definition of a partnership?” and “what is the difference between a general partnership, a limited partnership (LP), and a Limited Liability Partnership (LLP)?”
What is the Definition of a Partnership?
A partnership is a legal form of business operation between two or more people who share management and profits. If your Illinois company is owned and operated by more than one person, you’ll want to consider structuring your business as a partnership.
Partnerships are one of the most commonly formed business entities. Partnerships come in three different forms: general partnerships (GP), limited partnerships (LP), and limited liability partnerships (LLP). All three of these partnerships are considered pass-through entities, meaning the partnership itself doesn’t pay any taxes, but the income it earns is passed through to the owners’ personal income.
General Partnerships Explained
In a general partnership, all business owners manage the company and assume responsibility for the partnership’s debts and daily obligations. The advantages of general partnerships are that they are easy to create, operate at low cost, and require minimal ongoing maintenance. Unlike corporations, general partnerships are not required to hold annual meetings, issue stock, or separate personal assets from business assets. A general partnership is created when the business partners start business activities, so no state filing is required. Even though owners do not have to formally file or register for a general partnership with the secretary of state, partners legally have to comply with registration, filing, and tax requirements applicable to any business. Because general partners are not formed by means of a state filing, business owners don’t have to pay a formation filing fee, ongoing annual state fees, or franchise taxes.
The biggest negative is that general partnerships do not offer liability protection to business owners; meaning owners are legally considered the same as the business. Partners bear complete responsibility for the actions of the other partners. While this type of partnership is a great way for business owners to save money, it also delivers the highest amount of risk.
Limited Partnerships Explained
A limited partnership includes a mixture of both general partners and limited partners. General partners in a limited partnership, own and actively manage the business while completely assuming liability for the company, similar to partners in a general partnership. Limited partners, however, only serve as “silent” investors. Limited partners don’t have any control over the company, but they also are not subject to personal liability for corporate debts. Individuals may want to act as limited partners in a partnership, because their personal assets typically cannot be used to satisfy business debts and liabilities; the amount of liability is limited to their investment in the partnership. In an LP, the general partners’ personal assets can be seized to collect a debt or judgment, so they should always consider purchasing liability insurance to offset personal risk. LPs are also great for short-term projects that aren’t truly “businesses,” like producing films and family estate planning. Check out our article on Family Limited Partnerships.
Limited Liability Partnerships Explained
Limited liability partnerships have both general and limited partners, similar to an LP, but limited liability partners are protected from each other’s debts, errors, and legal obligations. LLPs can only be created by certain types of professional service businesses, including accountants, architects, doctors, attorneys, dentists, and other lawful professionals. Similar to LPs, LLP partners’ personal assets cannot be used to satisfy business debts and liabilities. The LLP does not protect the partners against their own malpractice or unlawful personal acts. For example, if three doctors start an LLP together and one of them is sued for malpractice, the other doctors won’t be personally liable to pay off that costly lawsuit. LLPs are popular with high-risk professions that seek outside investments.
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