A partnership is a business owned by two or more individuals. It is a corporate form of business ownership that is created by two or more business partners who agree to invest financially in the business and share in the profits or losses. However, the partners are also entitled to personal tax benefits. For example, the partners share profits and losses and can elect to deduct any losses from their personal taxes.
The partnership has a legally separate identity from the individual owners. The partners are responsible for the business’s liabilities and debts and are required to file a partnership tax return. A partnership, like a sole proprietorship, must be a "real" person. When a partnership is closed, the assets and liabilities are transferred to the partners.
There are two types of partnership, the general partnership, and the limited partnership. In a general partnership, the partners share equally the commitments and responsibilities of the business. This could become a problem if one of the partners enters into a bad agreement or makes some other significant mistake. All partners are responsible for the liabilities that may come from these mistakes. Third parties can also sue partners. If a general partnership has financial difficulties, then the partners may have to utilize their personal assets to cover the shortfall or let the partnership fail.
A limited partnership, as the name implies, has limitations on the partners’ liabilities for financial difficulties and lawsuits. In most states, a limited partnership must be registered with the Secretary of State, which involves fees to the state and more strict record-keeping to maintain the formality of the limited partnership.
While a written agreement setting out the rights and obligations of each partner is helpful to the running of the partnership, in most states, a written agreement between the parties is not required. The association of two or more people to carry on as co-owners of a business for profit could form a partnership, even if they did not intend to form a partnership. The best way to create a legal partnership is to file the required paperwork with the Secretary of State and draft a partnership agreement. A partnership agreement is important because it sets out each partner’s rights, roles, and responsibilities. It should include sections to discuss how new partners can be added, how partners leave, and how the partnership can be terminated. The agreement should be drafted with a vision of the future, both for growth, and demise. Try to think of all the ways the partnership could go wrong and how you want to address them if it happens.
In Illinois, partnerships are governed by the Uniform Partnership Act, 805 ILCS 206, and the Limited Liability Partnership Act, 805 ILCS 215. Illinois has two forms of partnerships, Limited Partnerships, and Limited Liability Partnerships. In Illinois, you cannot form a partnership online, you must file paper forms. The Secretary of State’s website provides downloadable forms, costs, and filing instructions.