Illinois Limited Liability Company Overview
The Illinois limited liability company
(LLC) continues to be the most popular form of business entity
in Illinois. The LLC is a form of business entity that combines the limited liability of corporations with the option of four different tax treatments (sole proprietorship, partnership, S-Corp and C-Corp) for federal income tax purposes. It provides limited liability to its members, flexibility in both management and capital structure, and pass-through treatment for federal income purposes. As with corporations, limited partnerships, and limited liability partnerships, the Illinois Secretary of State imposes fee and filing requirements on LLCs. An LLC is a legal entity distinct from its members, just as a corporation is legally distinct from its shareholders.
LLCs Generally Have The Following Features:
Limited liability, with exceptions similar to those applicable to corporations;
Limited life, i.e., specific termination date stated in the operating agreement (or its existence may be perpetual);
A prohibition against the transfer of management or membership rights (but not against the transfer of rights to profits) without unanimous or majority approval of the remaining members;
» Deferral to the LLC's operating agreement for purposes of determining the LLC's management structure; and
Dissolution upon the death, retirement, resignation, expulsion, bankruptcy, or dissolution of a member unless the remaining members elect (unanimously or by majority) to continue the LLC.
Illinois LLC Organization and Governance
One or more persons may organize an Illinois LLC
under the Illinois Limited Liability Company
Act by filing articles of organization with the Illinois Secretary of State. Owners of the LLC are called "members," and single-member LLCs are permitted. The articles of organization must specify whether the LLC is member-managed or manager-managed. The names and address of each member (in a member-managed LLC) or manager (in a manager-managed LLC) must also be included. The articles of organization may include the events that will trigger a dissolution or a date of dissolution; however, unlike a corporation's articles of incorporation, the articles of organization for an LLC need not include information concerning capitalization.
Absent an agreement to the contrary in the LLC's operating agreement, each member in a member-managed LLC has equal rights in the management and conduct of the LLC, and each manager in a manager-managed LLC has equal rights in the management and conduct of the LLC. A manager (a) must be designated, appointed, elected, replaced, or removed by a vote, consent, or approval of a majority of the members; and (b) holds office until a successor has been elected and qualified, unless the manager resigns or is removed prior thereto. The members, and the manager(s), if any, of an LLC may enter into an operating agreement to regulate the conduct of the company's business and to govern the relations among the members, manager(s), if any, and the company. The operating agreement is, in many ways, similar to a partnership agreement or a corporations bylaws. The Limited Liability Company Act permits a great deal of flexibility in the terms of an LLC operating agreement and generally provides that an operating agreement may modify any provision of the LLC Act governing relations among the members, managers, and the company.
Capitalizing the Limited Liability Company
Member contributions to the LLC may be in the form of cash, property, services, a promissory note, or an obligation to contribute cash or property or to perform future services.
Non-Tax Consideration in Selecting a Limited Liability Company
The limited liability company, similar to the corporate form of entity, limits the liability of its members to the extent of their contributions to the company. Generally, the personal assets of the members are protected against claims by creditors of the limited liability company, even in the event of bankruptcy. The liability of a manager of a manager-managed limited liability company is also generally limited by statute, except when the manager breaches his or her fiduciary duty. Like a corporation, the limited liability company itself can be found liable for tortious acts committed by employees acting on behalf of the company. A limited liability company should thus obtain insurance against tort liability and thereby protect the business as a going concern against such risks.
Some courts have displayed a willingness to apply the theory of "piercing the corporate veil" to limited liability companies, thereby increasing the risk that a member could be personally liable for the obligations of the limited liability company. The factors considered in determining whether the corporate veil would be pierced in a limited liability company situation may include all of the factors considered when applying the theory to a corporation, with the exception of strict corporate organizational formalities imposed by statute. For example, because the Limited Liability Company Act does not require annual meetings of members, as the Illinois Business Corporation Act does, the failure to conduct such meetings would not be used in the determination of whether to hold a particular member liable for the obligations of the limited liability company. However, if a limited liability company imposed on itself, through its LLC operating agreement, any corporate-like formalities then failed to follow such formalities, a court might look to such failure as further reason for allowing the “corporate” veil to be pierced in order to hold the LLC members personally liable.
Similar to a corporation's limited liability protection, the benefit of limited liability to an LLC may be illusory if the LLC intends to borrow funds or executes a lease or other agreement and the lender or other party to the agreement requires that a member personally guarantee the LLC's obligation.
The LLC provides limited liability to its members while also providing flexibility in both management and capital structure and pass-through treatment for federal income tax purposes.
Other Illinois LLC Forms
With the effectiveness of Public Act 96-126 on January 1, 2010, low profit limited liability companies, or L3Cs, have been introduced in Illinois. The new low profit limited liability company is a cross between a nonprofit
, charitable organization and a for-profit limited liability company. The L3C's primary purpose is to provide an important social benefit rather than to generate economic profit. The low profit limited liability company is expected to revitalize certain small businesses by attracting more investments from foundations and charitable business ventures.
Illinois is one of a handful of states that permits he organization of a type of limited liability company commonly referred to as a "Series LLC." Such an LLC has the ability to create within itself separate "series" or "cells" that have their own interests, liabilities, and members. Series LLCs are most commonly used in Real Estate ventures.