Overview of the Illinois Close Corporation

Fundamentals Of The Illinois Close Corporation

The statutory provisions of an Illinois close corporation can be found in Article 2A of the Illinois Business Corporation Act. A close corporation, also known as a closely held corporation, is a type of business entity that bears characteristics of both a traditional corporation and a partnership. Like a conventional corporation, a close corporation is a separate legal entity from its owners, which protects those owners (shareholders) from personal liability for the corporation’s debts and liabilities. This means that if the company incurs debt or is sued, the owners’ personal assets generally cannot be used to satisfy the corporation’s obligations.

On the other hand, a close corporation also shares some features with a partnership. One of the most distinct characteristics is that a close corporation typically has a small number of shareholders, often family members or close acquaintances. This small size allows for more direct management by shareholders without the necessity of a formal board of directors, making the operation more akin to a partnership. Also, the shares in a close corporation are typically not freely transferable or sold on public exchanges, again adding to the personal, partnership-like atmosphere.

This hybrid nature of a close corporation can provide certain benefits, such as more informal management and less regulatory burden than a traditional corporation, while maintaining the key advantage of limited liability protection. However, the lack of public market for the shares and potential conflicts among the small group of shareholders are potential downsides. As with any business structure, the suitability of a close corporation depends on the specific needs and circumstances of the business and its owners.

Operating A Close Corporation – Advantages and Disadvantages

Operating a close corporation comes with a blend of advantages and disadvantages compared to a traditional corporation and a partnership, shaped largely by its unique characteristics that borrow elements from both these structures.

On the positive side, the close corporation structure affords owners limited liability protection similar to a traditional corporation. This means that shareholders are generally not personally responsible for the corporation’s debts and liabilities. In contrast to a general partnership, where partners are personally liable for business debts, this is a significant benefit. Close corporations also offer the advantage of operational flexibility. They often operate without a formal board of directors, allowing shareholders to participate more directly in the day-to-day management, similar to a partnership. This can make decision-making quicker and more streamlined. In addition, close corporations may avoid some of the formalities and regulations associated with traditional corporations, such as holding annual meetings, which can reduce administrative burdens.

However, the close corporation structure is not without its disadvantages. One major drawback is the lack of liquidity, since shares in a close corporation are not usually freely traded on a public market. This can make it more challenging for shareholders to sell their stake and might reduce the potential for raising capital. Furthermore, the close-knit nature of a close corporation may lead to more personal disputes among shareholders, and without a board of directors to mediate, these disagreements can disrupt business operations. Lastly, while limited liability is a major advantage, it is not absolute. In certain cases, such as when the corporation fails to follow certain legal formalities, courts may “pierce the corporate veil” and hold shareholders personally liable. This risk is potentially more significant in close corporations due to their informal management structure.

A close corporation and a limited liability company (LLC) share several similarities, such as limited liability protection for owners, but they also have distinctive features that create unique advantages and disadvantages.

One of the primary advantages of an LLC over a close corporation is the flexibility in management structure and operations. LLCs have fewer formalities and regulatory requirements than close corporations. For instance, an LLC does not need to have a board of directors or hold regular meetings, unless specified in its operating agreement. This can result in lower administrative burdens and costs.

Another significant advantage of an LLC is its tax flexibility. An LLC can choose to be taxed as a sole proprietorship, a partnership, or a corporation. By default, an LLC has pass-through taxation, meaning the company’s profits pass through to the owners’ personal tax returns, avoiding the double taxation that can occur in a close corporation. However, a close corporation can elect to be taxed as an S corporation, also providing pass-through taxation, but this comes with additional restrictions on the number and type of shareholders.

Ultimately, the decision to operate as a close corporation will depend on the specific needs, circumstances, and risk tolerance of the business and its owners.

Organizing A Close Corporation in Illinois

Forming a close corporation in Illinois involves a number of key steps that require specific legal forms and documents to ensure that the business is properly organized and compliant with the relevant laws and regulations.

The first step in creating a close corporation in Illinois is filing Articles of Incorporation with the Secretary of State’s office. The form, called a BCA 2.10(2A), requires information such as the corporation’s name, registered agent, principal place of business, the number and type of shares the corporation is authorized to issue, and a statement that the corporation elects to be a close corporation.

It’s important to note that the corporation’s name must be distinguishable from any other business name registered in Illinois. Business owners should understand that even if the name is available to register in Illinois, this does not mean the name is available to use under trademark law. A trademark search and clearance of all state and federal trademark databases should be conducted before registering the close corporation with the Illinois Secretary of State. Furthermore, the corporation should ensure that its registered agent, typically an individual or a corporation that receives legal papers on the corporation’s behalf, is authorized to do business in Illinois.

After filing the Articles of Incorporation, the corporation should create a Shareholder Management Agreement. This is a crucial document for close corporations as it often stipulates how the corporation will be managed, outlines the rights and obligations of the shareholders, and may include restrictions on the transfer of shares.

In addition, the corporation should develop Bylaws, which serve as the corporation’s internal operating manual. They detail the day-to-day rules for the corporation and outline procedures for important matters such as appointing directors, issuing stock, and holding shareholder meetings.

Illinois law also requires corporations to maintain a record of its shareholders, amendments, bylaws, minutes of shareholder and director meetings, and any other important corporate records. These should be kept at the corporation’s principal place of business. Additionally, an  annual report needs to be filed with the Secretary of State’s every year to maintain the close corporation’s existence.

Finally, the corporation will need to obtain any necessary business licenses and permits, and register for state and federal taxes. This involves obtaining an Employer Identification Number (EIN) from the Internal Revenue Service, registering the corporation with the Illinois Department of Revenue, and applying to do business in the city and/or county where the corporations operations are conducted.