Is a Partnership the Right Business Entity for You?

Business Partnership

If you will not be the only person in your business entity, a general partnership is an option for you.   Partnerships are not limited to just individuals. You can partner with corporations or other legal entities.   A general partnership is considered a separate entity from the owners, but the general partners are personally liable for any liabilities of the partnership.  So a general partnership can sue and be sued. 

The Uniform Partnership Act (the “Act”), of Illinois governs general partnerships.   What exactly is a general partnership?    Time for some legal jargon…a general partnership is formed when two or more persons or other legal entities carry on for the purpose of operating a business and sharing in the profits, regardless of whether such persons or entities intended to form a partnership.   805 ILCS 206/101(f).    Huh?  Let me give you an example—if two or more individuals decide to operate a business with the understanding that they are sharing in the profits, a general partnership has been formed, whether they realize it or not or whether they intended to form a general partnership.   There doesn’t need to be a written agreement either.  You could open yourself up to liabilities without even realizing it!   A bit scary, right?   That’s why a consultation with an attorney can save you from a lot of headaches and aggravation. 

Fiduciary duties also attach in a general partnership.  This means that you owe your partners duties of loyalty and care, to name a couple.  You also can’t compete with the business of the partnership outside of the partnership.  This one is a big deal—the partners have the ability to bind the partnership.   A partner can enter into contracts on behalf of the partnership without any other partner’s knowledge or consent.   And because general partners remain individually and personally liable for the partnership’s obligations, you may be held accountable for your partner’s actions.    A high level of trust is recommended for entering into a partnership with anyone.  And, as always, a partnership agreement in writing is ideal.  If there is no written partnership agreement, the Act controls the relationship of the parties.    What is in the Act may not reflect what the parties intended or agreed upon, so it’s best to have a written agreement. 

Under the Act, a partner’s interest is not transferable unless all partners’ consent.   Typically, partners go into a partnership with partners for a specific reason—if their interest were transferable a partner may end up with some hooligan as a partner which could wreak havoc on the business.  A partnership agreement is a good idea so that the parties can outline what events would trigger a dissolution of the business.   

A general partnership is recommended in certain instances as it is less complicated than a corporation, but there are pitfalls, the biggest one being that you could be liable for your partners’ actions. 

There’s also limited partnerships, which are similar to general partnerships.  One difference is that a limited partnership has one or more “limited partners.”  A limited partner typically takes on the roll of investor and isn’t really involved in the operation or management of the business.  Their liability is also limited to the amount of their contribution—which doesn’t necessarily have to be cash.   As usual, there are some exceptions to a limited partner’s liability exposure.  There must also be at least one general partner in a limited partnership.  You cannot attempt to shield yourself from liability by making all partners in a limited partnership limited partners.   Nice try. 

Limited partnerships are statutory in nature—they are governed by the Uniform Limited Partnership Act (yay, more acts!)  A written agreement is not required, but strongly recommended.  Who wants to squabble in costly litigation about management, control, contributions or profits?   The way to avoid that is to have a written agreement.