PartnershipsThe Illinois Partnership Act defines “partnership” as an association of two or more persons to carry on as co-owners a business for profit. The existence of an Illinois partnership is dependent on the relationship between the parties. A partnership arises when the parties come together to carry on a venture for their common benefit, each contributing property or services and having a community of interest in the profits of the business venture. A partnership exists if certain conditions are met – regardless of the parties’ intent to join a partnership. For instance, if a husband and wife are jointly operating a business, unless it is clear from their financial records that one of them is the true owner and the other is simply an employee (in which case the business entity would be a sole proprietorship), the business is classified as a partnership and both husband and wife are considered partners and owners of the business.

Like sole proprietorships, an Illinois partnership does not insulate the general partners from the debts and liabilities incurred by the business – they are joint and severally liable. This partnership entity does, however, provide the advantage of a pass-through taxation (partnership tax structure) and provides the partners with control to establish their relationships with great flexibility. On the other hand, due to liability exposure of each partner, a major disadvantage is that there is the potential for a judgment enforced directly against the partners.

Case law has determined that the substance and not the form of a business relationship determines whether the relationship qualifies as a partnership. Moreover, the Illinois Code of Civil Procedure provides that (a) a partnership may sue or be sued in the names of the partners as individuals doing business as the partnership, of in the firm name, or both; and (b) an unsatisfied judgement against a partnership in the firm name does not bar an action to enforce the individual liability of any partner. Furthermore, as stated above, all partners of an Illinois partnership are jointly and severally liable for the wrongful acts of any other partner.

An Illinois partnership arises when the parties come together to carry on a venture for their common benefit, each contributing property or services and having a community of interest in the profits of the business venture.
In sum, there are advantages and disadvantages in deciding to form an Illinois partnership. The major advantage, as previously noted, is the ability to define the relationship between the parties that make up the partnership to the discretion of the partners – see Partnership Agreement. In contrast to corporations, it is not necessary to have ownership interest in capital and profits proportionate to the investment made in partnerships. Another benefit is that it is much easier to establish a desirable format for control in a partnership venture than a corporation because control of a corporation is based on ownership of voting stock and it is much harder to alter this ownership format. It is possible to sell equity interests in a partnership, and as such, the ability to raise capital in a partnership is greater than in a proprietorship. However, because there is greater familiarity with, and potentially less personal liability with the corporate form, a corporation, and better yet, a limited liability company, may have greater ability to raise capital than a partnership.

Transferring Rights in A Partnership

Finally, with advanced planning, it is relatively easy to transfer ownership rights when a partner dies, retires, or becomes disabled. The vehicle for transferring rights varies with each situation and legal counsel is highly recommended in order to avoid conflicts. A buy-sell agreement is the most common device for transferring ownership of a business on the death of a partner. Under such an agreement, the remaining partners agree to purchase the interest of the deceased partner. This allows the business to continue running smoothly with the same people in charge.