Do you want to form a limited partnership (LP) in Illinois, but you’re not familiar with the formation process?
A limited partnership can be a great alternative to a general partnership, but the LP is definitely more difficult to form compared to the more casual nature of the general partnership. In this guide, we’ll discuss all the crucial details of forming this business type in Illinois.
What Is an Illinois Limited Partnership?
There are several significant differences between the general partnership and the limited partnership (LP), starting with the roles of the partners themselves. With a general partnership, the partners split profits evenly and take equal responsibility when it comes to liability ― general partners are personally liable for the company’s debts and settlements.
With a limited partnership (not to be confused with the LLC), there is at least one general partner and one limited partner, which is the term for a partner that does not have managerial responsibilities, and their liability is limited to the amount of money they invested in the partnership.
Sometimes, you’ll hear limited partners referred to as “silent partners” due to their lack of direct involvement in the day-to-day operations of the company.
Another major difference is that the general partnership is not a formal business structure, which means you don’t even need to file formation documents with the state of Illinois, or pay any sort of formation fee. The general partnership is simply formed when the partners begin transacting business together.
On the other hand, a limited partnership does have a formal formation process with the Illinois state government, and there is also a formation fee involved.
How to Form an Illinois Limited Partnership (in 6 Steps)
Step One) Choose an LP Name
Whereas the state of Illinois allows general partnerships to operate under the individual names of the partners, that is not the case for limited partnerships, which must have a distinct business name.
Your limited partnership’s name is often the first impression you get to make on potential customers, and therefore it goes without saying that this is an important step. There are a few different aspects to take into consideration when selecting a name for your business:
In Illinois, all limited partnerships are required to identify themselves in the business name as such, be either including the words “Limited Partnership” or the abbreviation “LP” or “L.P.” in the name. Under no circumstances may a limited partnership include the words “Company,” “Corporation,” “Incorporated,” “Inc.,” or “Co.,” In addition, you cannot include any words that refer to other business types (like “corporation” or “incorporated”), and you also can’t use words that are typically used to refer to specific kinds of businesses (like “bank” or “law office”).
Another aspect to consider is including language that explains what your business does ― for example, if you’re a realtor, put the phrase “real estate” in your LP name. Additionally, if your business has strong values like being environmentally friendly, you can indicate that by including the word “green.”
Do You Like It?
At the end of the day, this is your business, and you should choose a name that makes you proud. You should also make sure your limited partnership’s name both sounds good when spoken out loud, and looks good when written down.
The most important consideration for naming an LP is to not get too attached to any one business name until you have either reserved the name with the state of Illinois, or you’ve officially formed your business.
Before registering a name in Illinois you are required to check its availability on the Business Entity Database. If the name is not currently registered to another Illinois business, you may reserve it by filing an Application for Reservation of Name (form LP 109) and paying a filing fee of $50.
Step Two) Designate a Registered Agent
Every limited partnership in Illinois is required to designate a registered agent, which is the individual or registered agent service that receives government correspondence on behalf of your business, then forwards those documents to you.
According to the Illinois Secretary of State,
Every domestic and foreign corporation must, at all times, maintain a registered agent with a registered office within the State of Illinois. The registered agent can be either a natural person or a domestic or foreign (licensed to transact business in this State) artificial legal entity (Corporation, LLC, LP or LLP).”
Without a registered agent in Illinois, you could lose your good standing and the state also has the right to dissolve your LP if they decide to. In a worst-case scenario, the state could fail to alert you regarding a lawsuit against your company, which could even lead to a judgment against your business because you didn’t defend yourself.
At the end of the day, we recommend designating a registered agent service to handle these requirements. Doing so will help eliminate junk mail and more importantly, keep your personal and/or business address off public record.
Step Three) File the Certificate of Limited Partnership
At this point, it’s time to legally form your new limited partnership.
Formation of an Illinois limited partnership is done through the filing of a document referred to as the Certificate of Limited Partnership. To sufficiently complete the form, you’ll need to include the following details:
- Limited partnership name
- Address of office at which business records will be kept
- Name of registered agent
- Address of registered office
- Explanation of limited partnership’s purpose
- Indication of whether the entity is a limited partnership or a limited liability partnership
- Total dollar amount of cash, properties and services contributed by all partners
- An optional briefing statement of partners’ membership termination and distribution rights
- Names and signatures of all general partners
Cost to Form an LP: The state of Illinois charges a filing fee of $150 to form a limited partnership.
Processing Time: Most business formation documents in Illinois are processed in between 5 and 10 business days.
Step Four) Create a Limited Partnership Agreement
While not legally required by the state of Illinois, a limited partnership agreement outlines some of the key operating principles of the business. Even though you don’t have to submit it to the state to form your LP, it’s still a vital document that describes the exact nature of the agreement between the general partners and limited partners.
The information included in a limited partnership agreement does vary depending on the nature of your business, the size of your company, and some other variables. In general, it’s good to get the following information down in writing:
- The term (in years) of your partnership
- Identities and roles of general and limited partners
- Initial capitalization and ongoing capital contributions
- Allocation of profits/losses
- Management structure
- Voting rights and meeting plans
- Accounting and record-keeping practices
- Conditions for transfer and dissolution
Step Five) Handle Taxation Requirements
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 a variety of important LP functions.
For instance, you’ll need an EIN if you want to hire any employees, and many banks require them to open business bank accounts as well. You’ll also need one for tax purposes, hence the name federal tax ID number. Get an EIN for your LP for free through the IRS.
Illinois has a corporate income tax, a personal property replacement tax, and a corporation franchise tax. In your limited partnership’s case, it’s likely you’ll be required to pay at least one of the three.Outside of these, other industry-specific taxes are commonly required depending on what taxable goods or services your limited partnership sells.
Fortunately, Illinois provides plenty of resources and information regarding state taxes and filing procedures through the Illinois Department of Revenue. From the website, you may review a list of state tax types, register for taxes, and conveniently file all of your business taxes through MyTax Illinois.
Depending on where in Illinois your business is located, you may also need to pay local taxes.
Some municipalities such as Chicago will likely have their own business tax requirements which businesses operating within their jurisdiction will be required to abide by.
Step Six) Obtain Business Licenses and Permits
While there is no general business license that will fully authorize your limited partnership to operate within the state, it will likely need one (or several) other regulatory licenses. These licenses are generally industry-specific, and can range from food vendor permits to animal welfare licensing. Information on the state’s regulatory licenses can be found through the Registration, Licenses, & Permits page of the Illinois state government website.
In addition to regulatory licenses, members of specified occupations will require professional licensing. These licenses are generally regulated by the Illinois Department of Financial and Professional Regulation and may be researched through the Professions Regulated by the IDFPR page.
Would You Prefer a Professional Form Your LP?
If you would rather have a professional take care of your formation paperwork for you, you have a couple of options. The less expensive choice is to hire a business formation service to create your limited partnership.
While some service providers stick to less complicated business entities like limited liability companies, some of our favorite options also provide LP formations ― namely, LegalZoom and BizFilings. Either one of them should do a great job forming your new LP.
If you want the maximum possible degree of expertise, you should also consider hiring a business attorney to form your limited partnership. This is certainly a more expensive route, but if you want the peace of mind that every step is completed correctly ― and that all of your options have been thoroughly explored ― hiring a lawyer is a great option.
Next Steps: What to Do After Creating an Illinois LP
Open a business bank account
We highly recommend that you establish a business bank account so that your business and personal finances are maintained separately. This is important because it helps protect your personal assets, and also makes filing taxes much easier. Once you receive your EIN from the IRS, you’ll be able to use it to establish an account at the bank or credit union of your choice.
If your Illinois limited partnership plans to hire one or more employees, you’ll need to abide by the state’s employer insurance requirements. All for-profit employers are required to pay for unemployment insurance. This can be done through the Illinois MyTax system. Employers in Illinois are also required to obtain workers’ compensation insurance, which can be researched using the Insurance Page of the Illinois Workers’ Compensation Commission. After you obtain these legally required policies, it’s probably also a good idea to pursue general liability insurance, as well as some industry-specific policies.
Income reportingLimited partnerships do not file business tax returns. Instead, the income is passed through the business entity to the partners, who then claim their share of profits or losses on their personal tax returns. Still, LPs do need to file an annual information return with the IRS, in which you report your business income, deductions, gains, and losses for the year.
All limited partnerships formed in Illinois are required by law to submit an Annual Report to the Illinois Department of Business Services each year in order to remain in good standing. The document costs $100 to file and requires the signature of a general partner.
We don’t recommend that you attempt to manage your business finances without the help of a professional. There is too much room for error, and a professional can ultimately save you time and money by guiding you on how to manage your business finances. At a minimum, enlist professional help to set you up with software and the steps for keeping up with your finances on a regular basis. Then, consult back with your accountant at least a couple of times per year – and especially at tax time – to ensure you’re keeping track of everything correctly.