A partnership is a way in which a business can be structured. A partnership is formed when two or more individuals carry on as co-workers in a business for profit.
A partnership is formed when individuals in a business share in the profits and the rights to control the business. Individuals who engage in a business in this manner will be considered partners.
There are three different kinds of partnerships a business can form, including:
- General partnerships;
- Limited liability partnerships (LLPs); and
- Limited partnerships (LPs).
The partnership structure that a business chooses will determine the liabilities that the partners are subject to as part of the partnership.
What is an LP?
Partnerships are one of the more common types of business entities. Limited partnerships (LPs) have both general and limited partners.
A limited partner is similar to a silent investor, but with some differences. Limited partners invest in a business but do not actively participate in the day-to-day operations.
Limited partnerships provide the partners with certain legal protections and rights. These protections shield the partners from individual liability claims for issues including:
- Debt;
- Losses;
- Violations directly related to the LP.
Limited partnerships are different from general partnerships. In a general partnership, each partner is jointly and severally liable for any losses incurred by the partnership. This type of partnership may put some partners at a disadvantage, especially those that play only a minor role or those that make smaller investments than the other partners.
Limited partnerships are required to have at least one general partner to be formed properly. The general partner is responsible for the day-to-day operations of the partnership as well as for making management decisions.
A limited partner, on the other hand, has only limited powers over the partnership. The limited partner may only be held liable for losses up to the amount of their investment in the partnership. A limited partner is mainly responsible only for investment duties in the partnership.
The requirements for forming limited partnerships vary from state to state. In Illinois, the Uniform Limited Partnership Act governs the creation and management of limited partnerships. The Illinois Secretary of State is responsible for the registration of limited partnerships.
What are the Requirements for a Limited Partnership in Illinois?
In Illinois, limited partnerships are required to have at least one general partner and at least one limited partner. A limited partnership must also have a physical address within the State of Illinois. A P.O. box is not an acceptable type of address.
If a limited partnership operates under an assumed name, or a name that is something other than the partners’ surnames, the business name must be registered with the state. In addition, the businesses’ limited partnership status must be designated by putting “L.P.” after the business name.
A limited partnership in Illinois must also designate a registered agent for their partnership. A registered agent is an individual who is authorized to accept important documents for the business, such as paperwork initiating a lawsuit.
The registered agent of the limited partnership must be present in Illinois. If an individual or their business needs help selecting a registered agent, they can seek the advice of a business lawyer to help them with the process.
What Paperwork Do I Need to Form a Limited Partnership?
In order to create a limited partnership, an individual must file a Certificate of Limited Partnership with the Illinois Secretary of State. This form may be submitted by mail or online. The LP may be required to file additional paperwork if the partners plan on operating their business under an assumed name.
The limited partnership must provide the following information in their Certificate of Limited Partnership:
- The name of the limited partnership;
- The physical address of the business;
- The name and address of the registered agent;
- The purpose of the limited partnership;
- The total investment of the partners, which is optional information;
- The partners’ agreed upon distribution and termination rights; and
- The signatures of all the limited partnership’s general partners.
What is a Partnership Agreement?
In addition to the state filing, the partners should consider drafting a written partnership agreement. A partnership agreement provides information regarding the rights and responsibilities of general and limited partners.
A partnership agreement often includes provisions regarding procedures for:
Partnership agreements are contracts that provide legal enforcement for the terms of the partnership operations. It is important to have partnership agreements in writing.
Partnership agreements may be referred to in the event a dispute or legal contention arises involving the activities of the partners and the partnership. If a lawsuit is filed, the court will likely examine a written agreement in order to determine the proper outcome of a dispute based upon the information contained in the agreement.
What are some Limited Partnership Disputes that may Arise?
As with any type of business structure, a limited partnership may experience legal disputes. Common legal disputes that arise with limited partnerships include:
- Disputes between general and limited partners;
- Disputes over the allocation of benefits;
- Internal disputes regarding the direction and goals of the partnership; and
- Legal violations including:
- tax fraud;
- securities fraud; and
- other types of white-collar crime.
Another common dispute that arises in limited partnerships is termination issues. In a limited partnership, a limited partner may withdraw and the entire partnership will not dissolve.
What Benefits Does Illinois Give to a Limited Partnership?
A limited partnership has specific benefits for the partners. The first is that a limited partnership does not have to file income taxes.
Instead of filing taxes, the income of the limited partnership passes through to the partners. The partners then report the income to the Internal Revenue Service (IRS) on their income taxes.
If an individual is a limited partner in the business, they may not be held personally liable for the debts and other financial obligations of the partnership. So long as the limited partner does not take an active role in the management of the partnership, their personal assets cannot be seized in order to satisfy the debts of the partnership.
What Disadvantages Does Illinois Give to a Limited Partnership?
Although limited partners are not personally liable for debts and financial obligations of the partnership, such as legal judgments, general partners may be personally liable. In other words, a general partner’s personal assets may be seized in order to collect on a debt or judgment against the limited partnership.
If individuals form a limited partnership, they should consider purchasing liability insurance to offset their risk of loss. Another option to reduce the partner’s risk of loss is to form a limited liability partnership (LLP).
In a limited liability partnership, all of the partners have limited liability protections. There are, however, different rules and procedures for limited liability partnerships in Illinois. A business lawyer can help individuals decide which type of partnership structure best suits their needs.
Should I Hire a Business Lawyer?
It is extremely important to have an experienced Illinois corporate lawyer assist you with any partnership issues you may face. While it seems like forming a partnership is a simple process, there are many rules, regulations, and considerations for individuals forming the business. A lawyer can ensure your business is properly formed and give you the best chance for success.
