The formation of a general partnership might be a good business structure choice for your Illinois business.
Here is why...
Partnerships can offer simple tax filings and, in some cases, liability protection. For example, in Illinois, all partnerships are considered pass-through entities.
A pass through entity means the partnership itself does not pay taxes, and the income it earns is passed through to the owners’ personal income.
Additionally, some partnership structures offer liability protection for the owners. This protection may allow those owners to shelter their personal assets from the business.
While Illinois offers four types of partnerships:
- General (GP)
- Limited (LP)
- Limited Liability (LL)
- Limited Liability Limited Partnership (LLLP)
this article will only address the formation of a "General" partnership in Illinois which does not offer liability protection but might offer other types of desired benefits to the owners.
What is a General Partnership (GP)?
A General Partnership (GP) is the most simple of business partnerships to form but offers no liability protection to the owners. The following are factors about a GP which might effect the desirability of this type of business structure:
- No liability protection (each partner is personally liable for all of the company’s debts)
- No personal asset protection (e.g.; personal home or cash, can be seized to settle business debts)
- Business income is taxed as personal income (e.g.; income from the business passes through to your personal income, where it is taxed as income)
- Business must pay a special personal property tax (e.g.; on the state level partnerships must pay a 1.5% Personal Property Replacement Income Tax but do not pay a traditional income tax)
However, the up-side is that this type of partnership is exempt from many laws which require more formalities regarding how the business should be named, run and managed. Therefore, for certain owners, these exemptions might offer them the maximum amount of freedom to do business as they wish.
Steps to Forming an Illinois GP
1) Chose a Partnership Name
Naming Guidelines: In Illinois a partnership may:
- use the surnames of the individual partners or
- use a fictitious business name
- If a fictitious name is used it must be distinguishable from the corporate or assumed name of any other company on file with the Illinois Secretary of State or any name that is currently reserved or registered.
Perform a Name Search : If a fictitious name is used, a name search should be conducted to make sure an appropriate name is selected for the partnership and that it is available. This name should be relevant to the industry the business will serve or is part of, and the name should be easily searchable for the average person.
2) File an Assumed Business Name
If a fictitious name will be used Illinois requires you to register an Assumed Business Name Certificate with the office of the county clerk in the county where the business is located. You will need to publish the partnership name in a local newspaper for three consecutive weeks. The publisher will provide you with a certificate that should be filed with the county clerk.
3) Draft the Partnership Agreement
Although a partnership agreement is not a required step for establishing a partnership, it should be considered a very critical step. The reason is that, in the absence of a written partnership agreement, that memorializes the partner's initial purposes, even honest partners who do not have bad intentions or ill-will, can find themselves in a legal battle. Therefore, a well written partnership agreement may ensure there are no misunderstandings between the partners and will help them decide, in advance, how to handle certain situations.
Some items to cover in a partnership agreement include:
- each partner’s contribution to the partnership
- the allocation of profits, losses, and draws
- the partners’ authority and management duties
- voting rules for decision-making
- how to admit new partners
- what happens upon the bankruptcy, withdrawal, or death of a partner
- how to resolve disputes
4) Obtain Licenses, Permits, and Zoning Clearance
If the business will offer professional services, depending on the type of business activity, Illinois may require the business to obtain business or professional licenses. Illinois provides a comprehensive database of every occupation that requires a license by a partnership via the State of Illinois - Illinois Business Portal . In addition, city and county governments will need to be checked for more information regarding local regulations, including licenses, building permits, and zoning clearances, that may apply to the partnership.
5) Obtain an Employer Tax ID
Partnerships are required, by the IRS, to obtain an Employer Identification Number, or EIN. An EIN is a nine-digit number that is issued by the IRS for tax reporting purposes. Partnerships must have an EIN regardless of whether or not they have employees. Registering for an EIN can be done online at the IRS website.
Illinois requires businesses to report taxes and file various employee reports. Your partnership may need to use the EIN when registering the business to report taxes through the Illinois Business Registration provided by the Department of Revenue. If the partnership has employees, it must report and pay employment taxes on a periodic basis whereby it will be able to report and pay all employment related taxes by registering through Illinois Department of Employment Security TaxNet.
Now that the business is formed - what next?
Once the partnership is formed, the next steps should be to:
- Open a business bank account: set up a bank account to keep the partner's business and personal finances separate.
- Obtain general liability insurance: Having adequate business liability insurance can protect the business and the partner's personal assets in the event of a lawsuit or other claim against the business.
- Report and pay taxes. If the business is required to report and pay taxes, such as sales tax and use tax, this can be done through the Illinois Department of Revenue Business Registration website.
Ready to form a Partnership?
If you know a general partnership is the structure you need to form and know you only need to generate specific forms and additional documents, with minimal attorney feedback, then you might want to purchase any one of the PLC, Ltd "Business Essentials - Partnership packages" or go to the "About Business Essentials" page to find out more about how to register for a free online account and gain access to view and request other "ad-hoc" online "Business Essentials" virtual legal services.
If you know that you have more complex needs, such as: help with deciding the type of legal entity to form, help with conducting name and/or TM search and registration, help with preparation of all forms and filing, help with any needed business licenses, help with the drafting of any customized agreements (between owners, founders etc) and, after formation, continued legal advice and guidance for your business - you can contact PLC, Ltd to inquire about a scheduled strategy session to find out more about flat-fee business formation packages and GC services offered. Click here to send an inquiry.