Partnerships are one of the most commonly formed business entities. Unlike a general partnership, a limited partnership (LP) allows a business to have both general and limited partners. A general partner takes an active role in the business’ management. A limited partner is comparable to a “silent investor”—he or she invests in the partnership, but does not actively participate in the business’ operation.
The process of forming a limited partnership varies from state to state. In Illinois, the Uniform Limited Partnership Act governs the creation and management of LPs. The Secretary of State is responsible for the registration of limited partnerships.
In Illinois, a limited partnership must have at least one general partner and one limited partner. Your limited partnership must also have a physical address within the state—a P.O. box is not sufficient.
If your partnership operates under an assumed name (something other than the partners’ surnames), you must register the business’ name with the state. Additionally, you must designate your business’ limited partnership status by putting “LP” after its name.
Finally, you must designate a registered agent for your LP. A registered agent is someone who is authorized to accept important documents (like paperwork initiating a lawsuit) for your business. Your registered agent must be physically present in Illinois. If you need help selecting a registered agent, a business lawyer can help you with the process.
To create a limited partnership, you must file a Certificate of Limited Partnership with the Secretary of State. This form can be submitted either online or by mail.
You must provide the following information on your Certificate of Limited Partnership:
- The name of your partnership,
- The business’ physical address,
- The name and address of your registered agent,
- Your limited partnership’s purpose,
- The total investment of your partners (optional),
- The partners’ agreed upon distribution and termination rights
- The signatures of all the LP’s general partners.
You may have to file additional paperwork if you plan on operating your business under an assumed name.
In addition to your state filing, you should consider drafting a partnership agreement. A partnership agreement defines the rights and responsibilities of both general and limited partners. For example, a partnership agreement may set out the procedures for distributing profits, adding partners, or terminating the partnership. Having a written partnership agreement can prevent extended litigation if a dispute occurs.
Limited partnerships have specific benefits. First, an LP does not have to file taxes. Instead, its income passes through to its partners (who must report this income to the IRS and pay taxes).
And, if you are a limited partner, you may not be personally liable for the business’ debts and other financial obligations. As long as a limited partner does not take an active role in the partnership’s management, his or her personal assets cannot be used to collect the partnership’s debts.
General partners, however, are personally liable for the business’ debts and other obligations (such as legal judgments). This means that a general partner’s personal assets can be seized to collect a debt or judgment against the LP. If you form a limited partnership, general partners should consider purchasing liability insurance to help offset this risk.
Additionally, you can consider creating a limited liability partnership (LLP). In an LLP, all partners have limited liability protections. However, different rules and procedures apply to LLPs in Illinois. A business lawyer can help you decide which business structure is best for you.
While completing a form is a simple process, a lot more goes into the structuring of a limited partnership. An Illinois business lawyer can help you follow the correct procedures and protect your financial interests.