The State of Illinois provides many different types of business entities for new businesses seeking to start operations. Besides the usual array of corporations and limited liability companies, Illinois has a rich jurisprudence of partnership types to choose from. These include the general partnership, the limited liability partnership, the limited partnership, and the limited liability limited partnership. Each type will be considered in light of management types, limited liability, and tax treatment. Also, a discussion on how to form each will be included.
The General Partnership
The general partnership is the simplest form of partnership in Illinois. A general partnership does not require much preparation or formality to create and in some circumstances the law will imply a partnership even if the partners did not subjectively intend to create a partnership. Illinois partnerships are governed by the Illinois Uniform Partnership Act, which provides "default rules" for partnerships absent a specific partnership agreement. The general partnership form is very flexible and partners can change most of the default rules by executing a written partnership agreement. Generally, each partner has an equal say in management of the partnership and each is personally liable on the debts of the partnership, making business insurance a necessity. The IRS and Illinois Department of Revenue treat partnerships as "pass through" entities, requiring a notice filing on Form 1065 and only taxing the partner's individual shares of profits or losses.
The Limited Liability Partnership (LLP)
The limited liability partnership (LLP) is a newer business entity. In a nutshell, the LLP is a general partnership that files a "Statement of Qualification" with the Secretary of State. A general partnership needs to be formed and a federal EIN obtained before the the Statement of Qualification is filed. The LLP is essentially a general partnership, but the partners are not individually liable on the debts of the partnership. The only personal liability that can be assumed is for the acts or omissions of the partner themselves (such as the malpractice of a lawyer in a legal partnership). The LLP is as flexible as a general partnership and can be structured in a great number of ways through careful and creative drafting of the partnership agreement. The federal and state tax treatment of an LLP is the same as a general partnership.
The Limited Partnership (LP)
A limited partnership is a very old business entity that has lost some popularity with the invention of limited liability companies in Illinois. The limited partnership places unlimited liability on one member (the "general partner") and allows limited liability for the other members (the "limited partners"). Historically, the limited partners would lose their limited liability if they engaged in any management activities in the partnership's business. However, Illinois now follows the Revised Uniform Limited Partnership Act which allows the limited partners to participate in management without losing their limited liability. For federal tax purposes, the limited partnership is treated as a pass through entity with the bonus of not requiring self-employment taxes to be paid on distributions to limited partners, provided they did not participate in management. A limited partnership is formed by filing a Certificate of Limited Partnership with the Illinois Secretary of State.
The Limited Liability Limited Partnership (LLLP)
The Limited Liability Limited Partnership (LLLP) is a new entity. It essentially is a limited partnership with a special designation noted on its Certificate of Limited Partnership that provides limited liability for all partners, including the general partner. Every other characteristic of the LLLP is the same. What is the difference between an LLP and LLLP? Management. The LLLP has limited liability for everyone, but if the limited partners in a LLLP refrain from management they can reap the federal tax benefits of being a limited partner whereas the LLP partner gets limited liability but basic partnership tax status.
Choosing the Best Form for Your Business
Many multi-member small businesses like the partnership format versus the limited liability company or corporate formats because of their pass-through tax characteristics and ease of formation. A corporation can be unduly formalistic for the small business because of the legally-required formalities to keep the corporate form in good standing, and it requires the preparation and filing of a separate income tax return. The limited liability company can be as flexible as a partnership, but it costs a great deal more to form and maintain than an Illinois partnership entity. Only you can choose the appropriate entity with the advice of your account and lawyer, but the Illinois partnership forms are worth looking into.
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