Over the next few posts, I’m going to discuss the types of business organizations that you might want to form for your Illinois small business. I’ll be comparing them based on three factors—how each is formed, what liability protection it affords, and what formalities the owners must follow. (Remember that you will also want to consider what kind of federal tax treatment is best for your business, which I talked about in my last post.) Today, I’m going to cover general partnerships, which differ from the other types of business organizations in all three respects.
Formation: As I pointed out in a footnote to an earlier post, general partnerships are not formed in the same way as other business organizations. In fact, people can form a general partnership inadvertently, without realizing the legal consequence of what they’re doing. Under the Illinois Uniform Partnership Act, all that it takes to form a general partnership is “the association of 2 or more persons to carry on as co-owners a business for profit.” If you and a friend decide to open a business together, you could form a general partnership whether you meant to or not. So be careful, and talk to one of the experts at Legal Ally as soon as you can when you decide to start a new business.
Liability Protection: Unlike the other business organizations I’ll be discussing in future posts, general partnerships do not protect their owners (called partners) from the liabilities of the partnership’s business. Instead, the law says that each partner is jointly and severally liable for the partnership’s liabilities. This means that if the partnership defaults on a contract, the other party to that contract can sue the partners personally for what the partnership owed. And if a partner or an employee of the partnership injures someone while carrying out the partnership’s business, the injured person can sue all the partners for his or her injury. In this sense, general partnerships are like sole proprietorships, so you should think carefully before choosing to operate a business using this kind of business organization.
Formalities: The law requires fewer formalities of general partnerships than other kinds of business organizations. This fact can be a double-edged sword. On the one hand, the lack of formalities can make it simpler and less expensive to operate a general partnership than another type of business organization. On the other hand, it can lead to poor record keeping, confusion, and conflict among the partners. Though not legally required, the partners in a general partnership should at least have an attorney draft a written partnership agreement that details the relationship between the partners and how decisions about the partnership’s business will be made. This will help protect the partners in the event of a conflict between them, as well as inform each partner of his or her responsibilities to the partnership.
The ease with which general partnerships can be formed and the imposition of relatively few formalities are both advantages of this type of business organization, though they can also be traps for the unwary. But the lack of any liability protection usually makes this type of business organization a poor choice for individuals. In my next post, I’ll discuss limited partnerships and limited liability partnerships, which address these problems in different ways. As always, if you have questions about these or other business organizations, or simply want to consult an experienced attorney about what’s best for your small business, call Legal Ally today!