Overview of Illinois Business Organizations

Business Formation, Organization & Registration Services

There are several compelling reasons why a person or group of people may decide to organize and register a new business in the State of Illinois. Firstly, Illinois has a significant and diverse economy, with many opportunities for new businesses. The state is home to a wide array of industries including manufacturing, agriculture, and technology, giving many different types of businesses a chance to thrive.

Establishing a legal business entity in Illinois provides several benefits such as liability protection. When a business is registered, its owners gain protection from personal liability for business debts and obligations. This means that in case of any business-related legal issues, the personal assets of the owners typically cannot be seized to settle business debts.

Additionally, registering a business provides a degree of legitimacy and credibility. Customers, suppliers, and investors often prefer to deal with registered businesses as opposed to unregistered sole proprietorships or partnerships. It sends a signal to these stakeholders that the business is serious and committed to its operations in the State of Illinois.

Illinois also has a supportive business environment with resources available for new businesses. These include business development centers and financing programs that provide support for businesses at different stages of growth.

Taxation can be another factor. While Illinois does have a corporate income tax, it also offers various tax incentives designed to attract and retain businesses, particularly in targeted industries or areas.

Lastly, registering a business in Illinois allows a company to legally operate within the state. It’s a necessary step to meet state laws and regulations, which might cover aspects like zoning, licensing, and permits.

In conclusion, organizing and registering a new business in the State of Illinois can provide many benefits, including liability protection, legitimacy, support, tax incentives, and legal operation within the state. However, the decision should always be made with consideration of the specific needs and circumstances of the business.

Choosing the Best Type of Business Entity

When choosing the best type of business entity to operate a new business in Illinois, several primary factors come into play. The nature of your business and its risk exposure is an important consideration. For businesses with high liability, choosing an entity type that offers personal liability protection, such as a corporation or a limited liability company (LLC), can be beneficial. This way, owners’ personal assets are typically protected in case of business debts or lawsuits.

Your business’s financial needs and how you plan to raise capital should also influence your decision. Some business structures, like limited liability companies and corporations, may be more attractive to investors. LLCs and Corporations can issue membership units or shares of stock, making it easier to attract investment. However, simpler structures like sole proprietorships and partnerships might be suitable for start-up businesses or small businesses with smaller capital needs.

Tax implications are another major factor to consider. Different business entities are subject to different tax rules and rates. For example, corporations taxable as C Corporations are subject to double taxation – both the company’s profits and the owners’ dividends are taxed. However, a corporation taxable as an S Corporation or an LLC taxable as an S-Corporation, partnership, or disregarded entity can allow profits to pass through directly to owners’ personal income without being subject to corporate tax.

Consideration should also be given to the level of control you want to maintain over your business. In sole proprietorships and partnerships, owners have complete control over the business. In contrast, in a corporation, decisions are often made by a board of directors.

Administrative requirements and costs associated with different entity types are important as well. Corporations, for example, have significant record-keeping, reporting, and operational procedures which could prove burdensome for some business owners.  Limited Liability Companies are much more flexible and do not require many of the record keeping or reporting requirements compared to a corporation.

Your long-term business goals, such as whether you plan to sell the business, go public, or pass it on to heirs, can also impact which entity is best. For instance, it’s relatively easy to transfer ownership of corporations and limited liability companies, making them a good choice if you plan to sell in the future.

Lastly, every state has different rules and regulations for business entities. Therefore, local legal and regulatory considerations must be considered when choosing your business structure.

In summary, the choice of business entity should take into account risk exposure, financial needs, tax implications, control, administrative requirements, long-term goals, and local legal considerations. It’s always advisable to consult with our business attorneys to make an informed decision based on your unique situation.

What Types of Business Entities Are Available in Illinois?

Corporations

An Illinois corporation is a type of business entity that is formed and registered in accordance with the regulations outlined by the state of Illinois, specifically under the Illinois Business Corporation Act of 1983 (805 ILCS 5). The formation, operation, governance, and dissolution of corporations in Illinois are all governed by this Act.

A corporation is a separate legal entity, distinct from its owners who are known as shareholders. This legal separation provides significant benefits, including:

  • Limited Liability: Shareholders’ liability for the debts and obligations of the corporation is limited to their investment in the company. Personal assets of the shareholders are typically protected if the corporation incurs debt or faces legal issues.
  • Perpetual Existence: A corporation has an indefinite lifespan. It continues to exist even if shareholders sell their shares, or in the event of a shareholder’s death.
  • Transferability of Ownership: Ownership in a corporation is typically easily transferable, with shares of stock sold to transfer partial or full ownership.
  • Raising Capital: It may be easier for corporations to raise funds since they can sell shares of stock

Corporations in Illinois, however, also have certain obligations and complexities. They must file annual reports with the Illinois Secretary of State and pay the associated fees. They are also subject to corporate income tax, and under certain circumstances, may face “double taxation”, wherein the corporation’s profits are taxed, and then dividends paid to shareholders are taxed again on individual tax returns.

It’s also worth noting that corporations in Illinois are required to have a board of directors and must adhere to certain requirements for corporate meetings and record-keeping.

Professional Service Corporation

A professional service corporation (PSC), which is governed by the Illinois Professional Service Corporation Act (805 ILCS 10), is a specific type of corporation that is formed by individuals who provide a professional service, typically requiring a license or significant specialized training. This could include professions such as law, engineering, accounting, architecture, or consulting, among others.

One of the key characteristics of a professional service corporation is that, like other types of corporations, it provides limited liability protection for its owners, also known as shareholders. This means that the personal assets of the shareholders are typically protected from the corporation’s debts and liabilities. However, in the case of malpractice or professional negligence, the individual professional may still be personally liable.

The way a PSC is taxed can also vary depending on the jurisdiction and the specific tax elections made by the PSC. In some cases, a PSC may be able to elect to be taxed as an S corporation, which is a pass-through entity for tax purposes, meaning the corporation itself does not pay income tax. Instead, the income or loss of the corporation is reported on the personal tax returns of the shareholders, and tax is paid at the individual level.

Medical Corporations

An Illinois medical corporation, which is governed by the Illinois Medical Corporation Act (805 ILCS 15), is a type of corporate entity that is used by licensed medical professionals, such as doctors, to provide medical services.

A medical corporation, like other corporations, is considered a separate legal entity from its owners, providing a level of protection for personal assets. This means the personal assets of the corporation’s shareholders are typically protected from the corporation’s business debts and liabilities.

However, it’s important to note that professional liability (for example, malpractice) is not covered by this liability protection. Individual doctors are still personally responsible for their own professional actions.

A key feature of a medical corporation in Illinois is that all shareholders, officers, directors, and employees who provide professional services must be licensed to practice the same profession. In this case, they all need to be licensed medical professionals.

Tax treatment of a medical corporation in Illinois is similar to other corporations. The corporation is taxed on its profits, and then any dividends paid to shareholders are taxed again on the shareholders’ personal tax returns, a situation often referred to as “double taxation”. However, medical corporations may have the option to elect to be treated as an S corporation for tax purposes, which is a pass-through entity and can help avoid double taxation.

The specific requirements and rules for creating and managing an Illinois medical corporation can be complex and are subject to change, so it’s advisable to consult with our business attorneys for the most accurate and up-to-date information.

Close Corporations

An Illinois Close Corporation, which is governed by the Illinois Business Corporation Act of 1983 (805 ILCS 5), also known as a Closely Held Corporation, is a type of corporate structure that typically has a small number of shareholders. The term is often used to describe a corporation that is owned by a small group of people, such as a family or small group of investors.

There are several defining characteristics of close corporations:

  • Limited Number of Shareholders: Close corporations typically have a small number of shareholders, often ranging from just a few individuals to a few dozen. In some jurisdictions, there may be a legal limit on the number of shareholders a close corporation can have.
  • Restricted Transfer of Shares: Shares in a close corporation are not freely traded on a public exchange like shares in a public corporation. Instead, there are often restrictions on how and to whom shares can be sold. These restrictions are often included in the corporation’s shareholder management agreement or corporate bylaws.
  • Operational Flexibility: Close corporations often have more flexibility in their operations compared to publicly traded corporations. They are usually not required to hold annual meetings or create a board of directors, though they still need to meet certain legal obligations.
  • Lack of Public Disclosure: Unlike publicly traded corporations, close corporations are not required to disclose financial information to the public. This can provide a degree of privacy that some shareholders find desirable.[/fusion_li_item]

Close corporations have the benefit of limited liability protection, which means shareholders are typically not personally liable for the debts of the corporation. However, they also require careful management of shareholder relationships, as disputes among a small group of shareholders can disrupt the business.

Benefit Corporations

A Benefit Corporation, which is governed by the Illinois Benefit Corporation Act (805 ILCS 40), is a type of for-profit corporate entity, legislated by U.S. state law, that includes positive impact on society, workers, the community, and the environment in addition to profit as its legally defined goals. The purpose of a Benefit Corporation is to create general public benefit, which is defined as a material positive impact on society and the environment.

Key characteristics of Benefit Corporations include:

  • Purpose: Benefit corporations are required to have a public benefit purpose written into their articles of incorporation. This purpose is broader than just making money for shareholders. It includes creating a positive impact on society, workers, the community, and the environment.
  • Accountability: Benefit corporations are accountable to their shareholders for meeting their defined public benefit goals and for considering how decisions affect all stakeholders, not just shareholders. This stakeholder group includes employees, customers, the community, and the environment.
  • Transparency: Benefit corporations must publish an annual benefit report that assesses their overall social and environmental performance against a third-party standard. This report is intended to provide transparency to shareholders and the public.

A Benefit Corporation stands somewhere between a traditional corporation and a nonprofit corporation. Unlike traditional corporations, benefit corporations have an obligation to consider the impact of their decisions on all stakeholders, not just shareholders. However, unlike nonprofits, they are still for-profit entities and have shareholders, can pay dividends, and aim to make profits.

Benefit corporations are often used by entrepreneurs and investors who are interested in using business as a tool to solve social and environmental problems, as well as making profits. They appeal to businesses that value transparency, accountability, and social good in addition to profits.

Not For Profit Corporation (Nonprofit)

Illinois Not For Profit Corporation (NFP), which is governed by the General Not For Profit Corporation Act of 1986 (805 ILCS 105), also known as a nonprofit organization, is a type of entity that’s organized to pursue a mission or purpose other than generating profit. While these organizations can, and do, earn income, any surplus income is reinvested back into the organization to further its mission, rather than being distributed to owners or shareholders, as it would be in a for-profit business.

Key characteristics of a nonprofit organization include:

  • Mission-driven: Nonprofits are founded to fulfill a specific mission, often related to addressing a social issue, providing a public benefit, or serving a specific group. This mission drives the activities of the nonprofit and is central to its identity.
  • No Profit Distribution: While nonprofits can generate income, any surplus must be reinvested in the organization’s mission. Profits are not distributed to members, officers, or directors.
  • Tax Exempt Status: In many jurisdictions, nonprofits can apply for tax-exempt status, meaning they are not required to pay certain taxes. In the U.S., for example, nonprofits can apply for 501(c)(3) status with the IRS, exempting them from federal income tax.
  • Public Disclosure: Nonprofits are often required to disclose financial information to the public, ensuring transparency and accountability.
  • Governance: Nonprofits are typically governed by a board of directors or trustees who oversee the organization’s operations and ensure it’s staying true to its mission.

It’s important to note that nonprofits cover a wide range of organizations, including charities, educational institutions, health organizations, and cultural institutions.

Limited Liability Company (LLC)

An Illinois Limited Liability Company (LLC), which is governed by the Illinois Limited Liability Company Act (805 ILCS 180), is a type of business entity that combines the limited liability protection of a corporation with the operational flexibility and pass-through taxation of a partnership.

Here’s a bit more detail about each of these aspects:

  • Limited Liability: Like a corporation, an LLC provides its owners, who are known as members, with limited liability protection. This means that the members are typically not personally responsible for the company’s debts and liabilities. Their personal assets are generally protected if the LLC incurs debt or faces legal issues.
  • Operational Flexibility: An LLC in Illinois is typically more flexible than a corporation when it comes to management and operations. It doesn’t require a board of directors or annual meetings unless specified in the operating agreement.
  • Pass-through Taxation: By default, an LLC is a pass-through entity for tax purposes. This means that the LLC’s profits and losses are passed through to the members, who then report them on their personal income tax returns. The LLC itself doesn’t pay federal income taxes. This helps avoid the double taxation that can occur with corporations (where both the corporation’s profits and the dividends paid to shareholders are taxed).

It should be noted that an LLC is a flexible business structure that can be taxed in several ways, depending on the number of members (owners) and certain elections made by the LLC.

  • Disregarded Entity: If the LLC has only one member, it’s treated as a disregarded entity for tax purposes by default. This means the LLC’s income and expenses are reported directly on the owner’s personal tax return, much like a sole proprietorship. The owner is responsible for paying self-employment taxes on the net income.
  • Partnership: If the LLC has two or more members, it is treated as a partnership for tax purposes by default. The LLC itself does not pay income tax. Instead, it files an informational return (Form 1065) and income and losses are “passed through” to the members, who report their share of the LLC’s income or loss on their personal tax returns.
  • C Corporation: An LLC, whether single-member or multi-member, can elect to be taxed as a corporation by filing Form 8832 with the IRS. If this election is made, the LLC will be subject to corporate tax rates, and profits and losses stay with the company until they are distributed to the members as dividends, which are then taxed again on the members’ personal tax returns (a situation known as “double taxation”).
  • S Corporation: An LLC can also choose to be taxed as an S Corporation by filing Form 2553 with the IRS, provided it meets the eligibility requirements. Like a traditional LLC, an S Corporation is a pass-through tax entity, which means profits and losses pass through to the members’ personal tax returns. However, only the salary paid to an owner-employee is subject to self-employment taxes (not the entire net income of the business), potentially leading to some tax savings.

It has been our experience that the limited liability company is the most popular form of business entity.  If you would like to learn more about LLC’s, please click on the following link to our webpage on Illinois limited liability companies.

Professional Limited Liability Company

A Professional Limited Liability Company (PLLC) in Illinois is a special type of business entity created under the Professional Limited Liability Company Act (805 ILCS 185). This type of entity is designed specifically for licensed professionals who want to provide professional services through an LLC.

Similar to a regular LLC, a PLLC provides limited liability to its members, protecting their personal assets from the company’s debts and obligations. However, it’s crucial to note that members of a PLLC remain personally liable for their own professional malpractice.

One key characteristic of a PLLC is that all its members must be licensed in the profession that the PLLC provides. This is different from other business entities where there are no specific professional licensing requirements for members.

PLLCs have a flexible management structure. Members can choose to manage the company themselves (member-managed) or appoint managers (manager-managed) to handle the company’s daily operations. This flexibility can make a PLLC more appealing compared to a professional corporation, which has a more structured and formal management requirement.

Taxation of a PLLC follows the pass-through principle, similar to a standard LLC. This means that the company’s profits and losses are reported on each member’s individual tax returns, avoiding the double taxation that can occur with traditional corporations.

Before selecting a PLLC as their preferred business entity, licensed professionals should consider these characteristics against their professional goals, potential risks, and financial circumstances.

Series Limited Liability Company

Am Illinois Series Limited Liability Company (Series LLC), which is governed by the Illinois Limited Liability Company Act (805 ILCS 180) is a special type of LLC that allows for the creation of separate “series” or “cells” within the main LLC. Each series operates like a separate entity with its own assets, liabilities, members, and business objectives, but all under the umbrella of a single LLC. This structure is not available in all jurisdictions, but it is an option in several U.S. states including Delaware, Illinois, and Texas.

Key features of a Series LLC include:

  • Liability Protection: Each series within a Series LLC has liability protection, similar to a traditional LLC. This means that the debts and liabilities of one series generally do not affect the other series within the LLC. Each series is treated as a separate entity for liability purposes.
  • Operational Independence: Each series can have its own members, managers, and business operations. They can also enter into contracts, hold assets, and sue or be sued, just like a traditional LLC.
  • Administrative Efficiency: While each series operates independently, there’s only one LLC to register at the state level, which can simplify paperwork and administrative tasks.
  • Flexibility: A Series LLC allows for a great deal of flexibility in business structuring and operations. Different series can be used for different business lines, investment purposes, or property holdings, allowing for diversified business activities under one umbrella entity.

The Series LLC is commonly used for real estate investments, where each series might own a separate piece of property. This can protect each property from the liabilities associated with the others. They’re also used in businesses with diverse product lines or divisions, or by asset holding companies. However, the Series LLC structure can be complex and is not recognized in all states or countries. Some jurisdictions might not respect the separateness of each series, potentially exposing all assets of the LLC to liability. It’s also important to note that each series may be required to keep separate records and accounting, and there may be uncertainty about tax treatment.

Low-Profit Limited Liability Company

An Illinois Low-Profit Limited Liability Company (L3C), which is governed by the Illinois Limited Liability Company Act (805 ILCS 180), is a type of business entity in the United States that combines characteristics of a for-profit business with a non-profit’s social-purpose mission. The L3C is designed to make it easier for socially-oriented businesses to attract investments from foundations and additional sources of capital.

Key characteristics of an L3C include:

  • Social Mission: The primary purpose of an L3C is to achieve a socially beneficial objective, not to earn profits. While it can generate profits, the social mission must take precedence.
  • For-Profit Structure: Despite the emphasis on social objectives, an L3C is a for-profit business entity. It can distribute profits to owners, unlike a non-profit.
  • Attracting Investment: L3Cs are specifically designed to facilitate investments from private foundations and others interested in combining social and financial returns. U.S. law allows private foundations to make Program-Related Investments (PRIs) in for-profit businesses if the investment supports the foundation’s mission. L3Cs, with their social mission, are set up to meet these PRI requirements.

Common uses for L3Cs include businesses focused on social, educational, scientific, or artistic goals. For instance, a business designed to provide job training and employment for people with disabilities might choose to organize as an L3C. Or a company aimed at developing and distributing affordable, environmentally friendly technologies could be another example.

Limited Liability Partnership

A Limited Liability Partnership (LLP), which is governed by the Uniform Limited Partnership Act (805 ILCS 215), is a type of business partnership that offers limited liability protection to its partners. This means that partners are not personally liable for the debts of the partnership or the negligent acts of other partners.

Key features of an LLP include:

  • Limited Liability Protection: Partners in an LLP enjoy protection from personal liability for business debts and actions of the partnership. This means that, generally, partners cannot lose more than they invest in the partnership and their personal assets are typically safe from business creditors.
  • Internal Flexibility: LLPs are generally characterized by a flexible internal structure. Partners can agree upon their roles and responsibilities, profit sharing, decision-making mechanisms, and other operational aspects as they see fit.
  • Tax Treatment: In many jurisdictions, LLPs are treated as pass-through entities for tax purposes. This means that the LLP itself does not pay income tax. Instead, income and losses pass through to the partners who report them on their individual tax returns.
  • Management: In most types of partnerships, management rights are given to all partners. This is true in an LLP where all partners can take part in the management of the business, unlike in a limited partnership (LP), where limited partners cannot engage in the management of the business.

Limited Liability Partnerships are commonly used in professions that traditionally operate as partnerships, such as law, accountancy, and architecture. They are popular because they allow the individual professionals to be shielded from personal liability for the malpractice of other partners.

Limited Partnership

A Limited Partnership (LP), which is governed by the Uniform Limited Partnership Act (805 ILCS 215), is a type of partnership consisting of two or more partners, with at least one general partner and one limited partner.

Key features of a Limited Partnership include:

  • General Partners: General partners are involved in the daily management of the LP. They have personal liability for the partnership’s debts and obligations, meaning their personal assets could be at risk if the business cannot meet its obligations.
  • Limited Partners: Limited partners contribute capital but do not participate in the management of the partnership. Their liability is typically limited to the amount of their investment, meaning they stand to lose their investment in the business but their personal assets are typically protected.
  • Pass-Through Taxation: Similar to other types of partnerships, LPs typically benefit from pass-through taxation. This means the partnership itself does not pay income tax. Instead, profits and losses pass through to the individual partners, who report them on their own tax returns.

Limited partnerships are typically used in situations where investors are willing to provide capital but do not want to participate in the management of the business or expose their personal assets to the business’s creditors. This structure is common in real estate investment, venture capital, private equity, and film production, among other areas.

It’s also worth noting that while limited partners are shielded from personal liability for the business’s debts and obligations, they could lose this protection if they participate in the management of the business. Therefore, limited partners must typically remain passive investors.

Do You Need Legal Assistance Starting A Business In Illinois?

Starting a business is a journey filled with both exciting opportunities and complex legal requirements. As you embark on this journey, we understand the importance of ensuring every step you take is sound, secure, and beneficial for your long-term success. We regularly assist individuals and organizations navigate the intricate process of business formation. Our team has an in-depth understanding of the various types of business entities — be it Limited Liability Companies, Corporations, Partnerships, or others.

Our legal services are comprehensive, ranging from advising on the appropriate business structure to meet your unique needs and goals, drafting organizational documents, ensuring compliance with state regulations, assisting with licensing requirements, and much more.

Our commitment is not only to help you establish your business legally and effectively but also to provide continued support as your business grows and evolves. Our team of experienced attorneys can offer insights and guidance on business contracts, employment law, intellectual property protection, and potential legal challenges that may arise in your business journey.