How to Become a Limited Partnership
(All 50 States)
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Forming an Illinois Limited Partnership
The limited partnership (LP) is a type of business entity with certain advantages over the general partnership and other types of partnerships.
It can provide liability protection for its partners, as well as asset protection from creditors. In this article, we will discuss how to form a limited partnership in all 50 states!
Before committing to a Limited Partnership, consider an Illinois LLC’s benefits (Limited Liability Company).
What is an Illinois Limited Partnership?
A limited partnership is a business entity with one or more general partners and one or more limited partners. The general partner(s) are responsible for the day-to-day operations of the company. Still, since they have unlimited liability, any debts incurred by the corporation will fall upon them personally.
A Limited Partnership can also provide some level of protection if the company is sued since no one partner can be singled out for responsibility. In a limited partnership, at least one of the partners must have unlimited liability (typically the general partner). In contrast, another has to be invested with some level of protection from debts and liabilities (the “limited” partner).
How Limited Partnerships in Illinois Work
Every Illinois limited partnership will have at least one general partner. The general partner is responsible for the daily operations of the business. The general partner can be a person or even an entity such as a corporation. The general partner makes important decisions in the business and is held liable for any debts or lawsuits.
A limited partnership also has at least one limited partner. These limited partners are more like investors and do not participate in the management of the business. A limited partner also has limited liability in the partnership.
The difference between an Illinois limited partnership and other partnerships is that the income tax is passed through to individual partners. This type of business entity has its own set taxes, so it’s important for you as an owner or partner in one such company to know how your personal share will affect where you pay your dues each year on April 15th (or whenever they’re due).
If a limited partner has a loss, it is treated differently from a general partner. The general partner can take a loss even if the individual has no additional income to offset it.
The limited partner has a passive income since they don’t engage in running the partnership. Because of this, they can’t take a loss to reduce their income taxes if there is no additional income to offset the loss with.
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How To Form An Illinois Limited Partnership
You can form a limited partnership by registering with your state and paying the filing fee. In addition to this, you will need to create an agreement that spells out all of the responsibilities for each partner to protect yourself from any issues arising later on down the line. The document should also include provisions answering how profits are divided among partners as well if something does happen with one of them unexpectedly, how you will proceed.
First Step: Choose a Name For Your LP
In the state of Illinois, you can operate under the names of the partners; however, in a limited partnership, you must have an actual business name.
Choosing a business name is an important step in forming your Illinois Limited Partnership. This will be your company’s brand, so you will want to choose a name that really stands out. Here are a few rules when choosing your business name in Illinois:
Illinois is a state where all limited partnerships must have the phrase “Limited Partnership” in their business name without abbreviation. They cannot include any words that refer to other businesses (like corporations or incorporated). They also can’t use words typically used for specific kinds of businesses like banks or law offices.
The final decision on what to call your business is personal, and you must find a name for the company that makes you proud. You should also consider if people will pronounce or spell out the name as well, since this may impact their opinion of how professional your company appears.
When considering naming an LP in Illinois, there are two things I would make sure not only look good but sound great too: firstly, choose something catchy (but don’t get attached) by reserving with the state; secondly, when forming a limited partnership ensure they have both memorable quality and easy pronunciation/spell ability!
Step Two: Registered Agent Designation
Limited Partnerships in Illinois are required to elect a registered agent. A registered agent is an individual or commercial service that receives legal correspondence on your business’s behalf.
To stay in good standing with the state of Illinois, it is important to select a registered agent for your Illinois LP.
LLC Formations Tip: We recommend using a professional registered agent service to ensure you stay in compliance.
Step Three: Certificate of Limited Partnership Filing
To legally form your new limited partnership, it is time for you to file a Certificate of Limited Partnership with the Illinois Department of Commerce.
This document will officially announce that this LP has been formed, and please be sure to fill in all required information correctly before submitting it!
To complete this form, you will need the following information:
- The LP’s legal name
- Duration of the LP
- Purpose of the LP (as per partnership agreement)
- NAICS Code
- Registered agent Info
- Principle Office
- Office in Illinois
- General Partners info (if applicable)
- Limited partners information
- Other matters – if any.
- Signatures Of All Partners
- Contact info
To file your Certificate of Limited Partnership, you can fill out the PDF form available online.
You have two options for submitting: fax or mail. The state of Illinois charges a filing fee of $150, and the standard processing time is 10-15 days, but delays may occur during peak season (October-February).
Step Four: Creating Your Limited Partnership Agreement
While this is not legally required in some states, a limited partnership agreement can help outline the key details of the business agreement.
You may not have to submit this to the state, but it’s important to keep this document in a secure place. It will outline the exact details of the partnership should you need to revisit it in the future. Here are a few things we recommend including in this document:
- Desired length of the partnership
- Roles and Identities of all Partners (general and limited)
- Initial capital and desired ongoing capital contributions
- Profit and Loss allocation
- Meeting and Voting rights
- Management Structure and Details
- Accounting expectations
- Conditions for a sale or closure of the partnership
Step Five: Tax Requirements
You will want to ensure you meet all local, federal, and state tax requirements in a limited partnership.
Limited partnerships require a federal tax ID number or EIN. An EIN is basically the business version of a social security number, and it’s used for various important LP functions such as hiring employees and opening bank accounts. Get your free IRS-provided EIN today!
Some states do not require LPs to file any type of formal income tax. LPs are not subject to corporate income tax, and because some states do not levy a state income tax, partners do what the government requires for federal taxes but nothing more!
You will need to file your own separate individual form as well, though you’re going by as an LLC or C-Corp. Be sure to check with your state’s taxation site for more information.
Depending on where your business is located in Illinois, you may need to pay local taxes as well.
Some larger cities and counties may require an additional local tax. It is imperative to review the local tax requirements in your business location.
Step Six: Business Licenses and Permits
The Illinois Department of Commerce offers a variety of business licenses for businesses operating in the state.
To qualify, most new and existing corporations will need to obtain one or more forms from their website which can either be printed out and mailed, or filed online after filling them out with your personal information on it.
Make sure you do the proper research to determine which licenses or permits you will need to conduct business in the state of Illinois.
Pros and Cons for Limited Partnerships
A limited partnership is an ideal type of business arrangement for those looking to limit their financial risk while still having the possibility of benefiting most from a company’s growth.
A major disadvantage to this arrangement is that if things go south and any legal liability falls on the general partner, they will be required by law to take care of it themselves without compensation – even though doing so could leave them bankrupt or worse off than before.
Limited Partnership Vs. Limited Liability Corporation
LLC’s and LLPs both have certain aspects of corporations and partnerships.
One of the most significant differences between a limited liability corporation and a limited partnership is that LLCs have more leeway in how they are structured.
Some other differences to consider are the management requirements, liability protections, insurance obligations, and tax benefits.
It is important to research the difference in your business state as this can vary depending on where you form your new company.
It’s also worth noting that an LLP will always be taxed like a general partnership, whereas an LLC can elect to file as either a C or S-Corporation for federal income tax purposes.
Choosing the Right Business Structure
It’s important to select a business structure that is right for your individual situation and needs.
When deciding between an LP and LLC, make sure to check the state regulations to see which will best meet your needs. While both entities share many similarities, there are also key differences you need to understand.
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