When you start a business you can choose from several types of business structures. The structure you choose determines how the business will be taxed, if you are personally responsible for the business’ debts, and more.
If you are going into business with others, you may consider forming a partnership. Partnerships offer simple tax filings and, in some cases, liability protection. Illinois offers four types of partnerships, detailed below.
Types of Partnerships: Liability & Tax Considerations
In Illinois, all partnerships are considered pass-through entities. This means the partnership itself doesn’t pay any taxes, but the income it earns is passed through to the owners’ personal income. Although the IRS considers partnerships pass-through entities, partnerships must file an annual report with the IRS in addition to the individual partners’ annual tax returns.
Personal liability is the other important topic to consider when forming a business. Personal liability refers to how personally responsible the owners are for the business’ debts and obligations. Some partnership structures offer liability protection for their owners, allowing them to shelter their personal assets from the business. For example, if your partnership loses a lawsuit and has to pay a huge settlement, personal liability will help protect your house, cash, and savings from the settlement.
This protection will not apply in all cases, such as if you owe taxes, commit fraud, or do something that violates the partnership’s liability protection.
The types of partnerships offered in Illinois are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
The simplest form of a partnership, the general partnership offers no liability protection but also isn’t hindered by very many laws, offering maximum freedom to do business as you wish.
- No liability protection, each partner is personally liable for all of the company’s debts
- Your personal assets, such as your home or cash, can be seized to settle business debts
- Income from the business passes through to your personal income, where it is taxed as income
- On the state level partnerships must pay a 1.5% Personal Property Replacement Income Tax but do not pay a traditional income tax
- Exempt from a lot of rules regarding how the business should be named, ran, and maintained—no need for lots of complicated paperwork
Limited Partnership (LP)
Limited partnerships are similar to general partnerships, but offer two levels of partners: limited and general partners.
- Limited partners are not allowed to manage the day to day operations of the business, but enjoy personal liability protection
- Limited partners are only liable for the money they’ve invested into the company
- General partners are fully liable for the business debts, but they control the day to day operations
- Taxed as a pass-through entity, like a general partnership
- Like GPs, LPs must also pay the state of Illinois a 1.5% Personal Property Replacement Income Tax but are not required to pay a traditional income tax
- Very popular with partnerships that want to attract outside investors that typically act as limited partners, protecting them from the company’s debts and obligations
Limited Liability Partnership (LLP)
In a limited liability partnership partners can’t be held liable for other partners’ mistakes, errors, or outright fraud. These types of partnerships are very popular with professionals that expect to take on a lot of liability risk (typically as the result of lawsuits), such as doctors and lawyers. For example, if three doctors start an LLP and one of them is sued for malpractice and loses a costly lawsuit, the other doctors won’t be personally liable to pay off that debt.
- Similar to a general partnership, but each partner is only liable for their investments like a limited partner in an LP
- Each partner is protected from the other partners’ debts and obligations
- They are also subject to the 1.5% Personal Property Replacement Income Tax in Illinois which must be paid directly to the state
Limited Liability Limited Partnership (LLLP)
In a limited liability limited partnership, you find a blend of LP and LLP advantages. An LLLP has both general and limited partners, but they are all protected from each other’s debts, errors, and legal obligations. Like an LLP, the LLLP is popular with high-risk professions that also seek outside investment.
- Similar to an LLP where each partner is not liable for the others’ liability
- Two types of partners, general and limited partners, in which the general partners manage day to operations and limited partners are more like silent investors
- Like the other partnership forms, they are required to pay the 1.5% Personal Property Replacement Income Tax, rather than a traditional income tax
- Taxed as a pass-through entity like a general partnership
Limited Liability Company
If you need additional taxation choices or greater protection from personal liability you may want to consider forming a limited liability company (LLC). The LLC business structure combines many of the advantages of partnerships while offering greater flexibility in tax structures. On the downside, they often require more effort to maintain than a partnership but even then, they are known for their simplicity.
How to Form a Partnership in Illinois
After deciding between the four partnership types available, you will want to get your business going by filing the appropriate paperwork, which you can do in just a few steps.
Step 1: Select a business name
Any Illinois partnership must operate with a unique name. Additionally, this name must contain an indication of the type of partnership that is being operated. So, if you were planning to open a wine tasting room called Spectacular Sips and you wanted to form a limited liability partnership, you would need to make sure the name Spectacular Sips LLP is available by checking with the Secretary of State Website.
Step 2: Register the business name
After you have confirmed that your name (Spectacular Sips LLP in this example) is available, you will need to reserve the name. The procedures differ depending on the type of partnership you are forming but you can learn more about your choices at Secretary of State Website.
Step 3: Complete required paperwork
The paperwork you will need to complete will vary depending on the type of partnership you want to form.
General Partnership (GP) and Limited Liability Partnership (LLP) – In Illinois, there isn’t a requirement to register your GP, although you may register it by filing a Statement of Partnership Authority with the Secretary of State if you would like something on record. You will also use the Statement of Partnership Authority to register an LLP.
Limited Partnerships (LP) and Limited Liability Limited Partnerships (LLLP) – In Illinois, LPs and LLLPs must register with the Secretary of State by filing a Certificate of Limited Partnership and paying the appropriate fees.
Step 4: Determine if you need an EIN, additional licenses or tax IDs
Partnerships with employees should obtain an Employer Identification Number (EIN) from the IRS. Additionally, some businesses require additional licenses from the state in order to operate. Further taxes may be required as well, depending on your business.
Step 5: Get your day to day business affairs in order
After registering your business with the Secretary of State, you are ready to formalize the presence of your business and you should take the time to set up:
- Bank accounts for your business
- Insurance for your company
- A website for your company
LegalZoom can help you form a limited partnership or limited liability partnership. We can also file the paperwork to form your business, help you find a registered agent, and get you in touch with an attorney or tax professional.