Jake Lawson here. After 15+ years helping entrepreneurs structure their businesses, I need to give you some tough love about general partnerships: they’re usually a terrible idea. I know that sounds harsh, but I’ve seen too many business friendships destroyed and too many entrepreneurs lose personal assets because they chose the “simple” option. General partnerships combine the worst aspects of business relationships—unlimited personal liability with shared decision-making complexity. If you’re considering this structure, let me explain why you probably shouldn’t, and if you’re determined to proceed anyway, how to do it safely.
Thinking about starting a general partnership in Illinois? Before you and your business partner shake hands and dive in, let me explain what you’re actually agreeing to—and why it’s probably not what you want.
What Is a General Partnership, Really?
A general partnership isn’t a formal business entity you file with the state. It’s what happens automatically when two or more people agree to operate a business together for profit. The moment you and your partner start taking business actions with shared goals, Illinois law considers you a general partnership.
Here’s the scary part: You can create a partnership accidentally. If you and a friend start selling products together at a farmers market, splitting profits and losses, you’ve legally created a general partnership—whether you meant to or not.
Key point: Unlike LLCs or corporations, partnerships exist by default, not by choice.
The Partnership Problem: Why I Almost Never Recommend Them
After helping over 1,200 entrepreneurs structure their businesses, I can count on one hand the number of times a general partnership made sense. Here’s why they’re usually wrong:
Unlimited Personal Liability (For Everyone)
The nightmare scenario: Every partner is personally liable for all partnership debts and liabilities. If your partner makes a business decision that results in a $500,000 lawsuit, creditors can come after your personal assets—house, car, savings—even if you had nothing to do with the problem.
Real example: Partner A signs a contract without Partner B’s knowledge. The contract goes bad, resulting in a lawsuit. Both partners are personally liable for the full amount, regardless of who made the decision.
Joint and Several Liability
This legal concept means creditors can collect the entire debt from any partner. If your partner declares bankruptcy, creditors can pursue you for 100% of partnership obligations.
Translation: You’re not just responsible for your share—you’re responsible for everything.
Partnership Disputes Are Business Killers
The statistics: Partnership disputes are the leading cause of small business failure among multi-owner businesses. When partners disagree about major decisions and have equal authority, businesses often grind to a halt.
Common conflicts:
- Financial management and spending
- Business direction and strategy
- Work allocation and responsibilities
- Profit distribution and compensation
- Exit strategies and business valuation
The “Simple” Myth
People choose partnerships because they seem simple. This is false. To operate safely, you need:
- Partnership agreement (just as complex as an LLC operating agreement)
- DBA registration (same as LLC)
- EIN from the IRS (same as LLC)
- Separate business banking (same as LLC)
- Annual tax filings (Form 1065 + individual K-1s)
Reality check: You’re doing nearly the same paperwork as an LLC without getting liability protection.
When General Partnerships Might Make Sense (Very Rare)
I’m not completely against partnerships. In very specific situations, they can work:
Professional Service Partnerships
- Law firms (where partners want personal liability for malpractice)
- Accounting firms (in states requiring partnership structure)
- Medical practices (certain regulatory requirements)
Family Businesses with Specific Goals
- Spouses operating small businesses with comprehensive insurance
- Family members with significant assets already protected in trusts
- Temporary business ventures with defined end dates
Investment Partnerships
- Real estate investment groups
- Private equity arrangements
- Venture capital structures
Critical requirement: Even in these cases, comprehensive insurance and detailed partnership agreements are essential.
The LLC Alternative: Why It’s Usually Better
Here’s why I recommend Illinois multi-member LLCs over general partnerships:
Liability Protection
LLC members are not personally liable for business debts and obligations. Your personal assets stay protected.
Tax Similarity
Multi-member LLCs are taxed exactly like partnerships by default. You get the same pass-through taxation without the liability exposure.
Management Flexibility
LLCs can be member-managed (like partnerships) or manager-managed (more structured). You choose what works best.
Credibility
LLCs are taken more seriously by banks, vendors, and customers. No one questions what an LLC is.
Cost Comparison
Illinois Partnership:
- Formation: $0
- DBA registration: $25-50
- Partnership agreement: $500-2,000 (if done properly)
- Annual complexity: High (Form 1065 + K-1s)
- Formation: $150 (state fee)
- Operating agreement: $500-2,000 (similar complexity)
- Annual report: $75
- Annual tax complexity: Same (1065 + K-1s by default)
The math: You save $150 upfront to accept unlimited personal liability. That’s not smart business.
How to Start an Illinois General Partnership (If You Absolutely Must)
If you’re determined to proceed despite the risks, here’s how to do it as safely as possible:
Step 1: Business Planning and Partner Evaluation
Critical partner assessment:
- Financial stability and credit history
- Work ethic and time commitment
- Decision-making style and communication
- Long-term goals and vision alignment
- Exit strategy preferences
Red flags to avoid:
- Partners with significant personal debt
- Different risk tolerance levels
- Unclear work allocation expectations
- No discussion of exit strategies
Step 2: Draft a Comprehensive Partnership Agreement
This is not optional. A partnership agreement protects all parties and should include:
Ownership and Financial Terms:
- Ownership percentages for each partner
- Capital contribution requirements
- Profit and loss allocation methods
- Draw and distribution policies
Management and Operations:
- Decision-making authority and voting rights
- Day-to-day management responsibilities
- Major decision approval requirements
- Conflict resolution procedures
Partner Changes:
- Adding new partners (approval process)
- Partner withdrawal procedures
- Death or disability provisions
- Buy-sell agreement terms
Business Operations:
- Business purpose and scope
- Partner time commitments
- Compensation structures
- Non-compete agreements
Get legal help: Partnership agreements should be drafted by attorneys familiar with Illinois partnership law.
Step 3: Business Name and DBA Registration
Illinois requirements:
- Default name: All partners’ legal names (Smith, Jones & Brown)
- DBA required: For any other name (Chicago Consulting Group)
- Registration: With county clerk where you operate
- Cost: $25-50 depending on county
Naming considerations:
- Check name availability
- Consider trademark implications
- Think about future expansion
- Avoid names implying different business structures
Step 4: Get an EIN from the IRS
Why it’s required:
- All partnerships must file Form 1065 annually
- Needed for business banking
- Required for any employees
- Protects partners’ Social Security numbers
How to apply:
- Apply directly with IRS online (free)
- Takes about 15 minutes
- Receive EIN immediately
- Don’t pay third-party services
Step 5: Business Licensing and Registration
Illinois requirements:
- No general state business license required
- Industry-specific licenses may be needed
- Local permits and licenses
- Registration with Illinois Department of Revenue
Common license categories:
- Professional services (accounting, legal, medical)
- Food service and retail
- Construction and contracting
- Transportation and logistics
Step 6: Business Banking and Financial Management
Banking requirements:
- Partnership agreement (signed by all partners)
- EIN confirmation letter
- DBA filing (if applicable)
- Photo ID for all partners
Financial best practices:
- Separate business and personal finances completely
- Establish clear accounting procedures
- Regular financial reporting to all partners
- Professional bookkeeping services
Step 7: Insurance Coverage (Critical)
Essential insurance types:
- General liability insurance
- Professional liability (errors & omissions)
- Business interruption insurance
- Key person life insurance on all partners
Why insurance matters: Since you have unlimited personal liability, comprehensive insurance is your only protection against catastrophic losses.
Illinois-Specific Partnership Considerations
State Law Framework
Illinois follows the Uniform Partnership Act, which provides default rules for partnership operations. Your partnership agreement can override most default provisions.
Tax Registration
Most Illinois partnerships must register with the Illinois Department of Revenue for:
- Sales tax (if applicable)
- Withholding tax (if hiring employees)
- Use tax obligations
Annual Reporting
While partnerships don’t file annual reports with the Secretary of State, they must:
- File Form 1065 with the IRS
- Provide K-1s to all partners
- File Illinois partnership returns
Common Partnership Mistakes I’ve Seen
Handshake Agreements
The problem: Verbal agreements lead to disputes when memories differ about terms.
The solution: Always have written partnership agreements.
Unequal Effort, Equal Ownership
The problem: Partners with different time commitments but equal ownership create resentment.
The solution: Align ownership with actual contribution and effort.
No Exit Strategy
The problem: Partners assume the business will last forever.
The solution: Plan for dissolution from the beginning.
Mixing Personal and Business Finances
The problem: Destroys any chance of liability protection and complicates taxes.
The solution: Separate business banking and accounting from day one.
Inadequate Insurance
The problem: Thinking “we’re just a small business” protects you from lawsuits.
The solution: Comprehensive business insurance appropriate for your risk level.
Converting from Partnership to LLC
If you start as a partnership and want to convert to an LLC later:
The process:
- Form new Illinois LLC
- Transfer partnership assets to LLC
- Obtain new EIN for LLC
- Update all contracts and agreements
- Notify customers, vendors, and banks
- File final partnership tax returns
The cost: Significantly more than starting with an LLC initially.
Making the Smart Choice
Here’s my decision framework:
Consider General Partnership Only If:
- You’re operating a professional service requiring partnership structure
- All partners have significant personal asset protection already in place
- You have comprehensive insurance coverage
- This is a temporary arrangement with a defined end date
Choose LLC Instead If:
- You want liability protection (which is almost everyone)
- You plan to grow the business beyond initial partners
- You want banking and vendor credibility
- You can afford the $150 Illinois filing fee
Never Choose Partnership If:
- Partners have different risk tolerance
- You’re in a high-liability business
- Partners have significant personal assets to protect
- You haven’t discussed exit strategies
The Bottom Line
General partnerships are legal structures for people who don’t want to choose a legal structure. They happen by default when people go into business together without making conscious decisions about liability, management, and protection.
In Illinois, with affordable LLC formation costs ($150) and identical tax treatment, there’s rarely a good reason to accept unlimited personal liability and joint responsibility for your partner’s decisions.
Yes, partnerships seem simpler initially—no state filing required, no annual reports, no registered agent. But this simplicity is an illusion. To operate safely, you need the same documentation and procedures as an LLC, without getting the protection.
My strong recommendation: Skip the partnership structure entirely and form an Illinois multi-member LLC. You’ll get the same tax benefits, similar operational flexibility, and crucial liability protection for about the cost of a nice dinner.
If you’re absolutely determined to form a partnership, follow the steps above carefully, get comprehensive insurance, and hire an attorney to draft your partnership agreement. But do yourself a favor: as soon as you can afford it, convert to an LLC. Your future self will thank you.
Questions about business structure choices or need help deciding what’s right for your multi-owner business? That’s exactly why I built llciyo.com—to provide honest guidance based on real experience with business structures that actually protect entrepreneurs.
Ready to make the smart choice? Check out our comprehensive guide to forming an Illinois multi-member LLC, including operating agreement templates and management structure options. No sales pitches, just the facts you need to protect your business and personal assets.