Fundamentals Of The Illinois Corporation
Illinois corporations are governed by the Business Corporation Act of 1983 (805 ILCS 5). A corporation is a form of business organization that is a distinct legal entity separate from its owners, who are known as shareholders. This separation provides the corporation with several unique characteristics that potential business owners should understand before deciding to form a corporation.
One of the primary features of a corporation is limited liability protection. Shareholders are generally not personally liable for the debts and obligations of the corporation. This means that in most cases, a shareholder’s risk is limited to the amount they have invested in the company and their personal assets are protected.
Corporations also offer continuity of existence. Unlike sole proprietorships and partnerships, corporations continue to exist even if the owners change. This feature can be particularly valuable for businesses that intend to have a long lifespan.
Furthermore, corporations have the ability to raise capital by issuing shares of stock. This can make it easier for corporations to attract investors and finance expansion. However, corporations are subject to specific regulations regarding the issuance of stock and the management of shareholders’ rights.
Despite these advantages, there are also potential downsides to forming a corporation that new business owners should consider. One of these is double taxation. Unless a corporation elects to be treated as an S corporation, it is taxed as a separate entity at the corporate level, and shareholders are also taxed on dividends they receive, resulting in a double taxation.
Moreover, corporations face more regulations and requirements than other business forms. These can include holding regular board and shareholder meetings, recording minutes, and more extensive reporting requirements. Corporations are also more expensive to form than sole proprietorships and partnerships.
In conclusion, while corporations offer benefits such as limited liability, potential for raising capital, and continuity, they also come with downsides such as potential double taxation, greater regulatory requirements, and higher formation costs.
Operating A Corporation – Advantages and Disadvantages
Operating a corporation has its unique set of advantages and disadvantages when compared to operating a limited liability company (LLC) or a partnership.
On the positive side, corporations offer strong limited liability protection, which shields shareholders from personal liability for corporate debts or obligations. This is similar to the liability protection provided in an LLC, but contrasts with a general partnership where partners can be personally liable for business debts. Additionally, corporations have an advantage in raising capital, as they can issue shares of stock, an option not available to partnerships and only available to LLCs in a limited way. This can be attractive to outside investors. Moreover, corporations have a perpetual existence, meaning the business can continue indefinitely beyond the lifespan of the original owners. This continuity can provide stability and is not generally characteristic of partnerships.
However, corporations have notable disadvantages when compared to LLCs and partnerships. A major drawback is the potential for double taxation. Unlike LLCs and partnerships which typically have pass-through taxation (where business profits are only taxed once at the individual level), corporations can be subject to double taxation, where profits are taxed at both the corporate level and again when distributed to shareholders as dividends. However, smaller corporations may qualify to be taxed as an S corporation, avoiding this double taxation.
Additionally, corporations face more administrative burden and regulatory scrutiny than LLCs and partnerships. They are required to hold regular meetings, maintain corporate records, and comply with more extensive reporting requirements. This can mean more paperwork, higher costs, and more time spent on administration.
In summary, while corporations offer advantages such as strong limited liability protection, the ability to raise capital through stock issuance, and perpetual existence, they also come with disadvantages including potential double taxation and increased administrative burden and regulatory compliance. Choosing between a corporation, an LLC, or a partnership requires careful consideration of these factors in light of the specific needs and objectives of the business.
Organizing a Corporation In Illinois
Forming a corporation in Illinois involves several important steps and requires the completion of various legal forms to ensure that the business is correctly established and compliant with state laws and regulations.
The process begins with filing Articles of Incorporation with the Secretary of State’s office. In Illinois, this is done using form BCA 2.10. This form requests pertinent details about the corporation, such as its name, principal office address, the number and type of shares the corporation is authorized to issue, and the name and address of the registered agent who is authorized to receive legal correspondence on behalf of the corporation.
The corporation’s name must be unique and distinguishable from other registered businesses in the state. Note, business owners should understand that even if the corporation’s name is available to register with the Illinois Secretary of State, this does not mean it is available for use under trademark law. Business owners are encouraged to conduct a search and clearance of all state and federal trademark databases to ensure the name is available for use before registering the corporation. Also, the registered agent must be authorized to do business in Illinois.
Once the Articles of Incorporation have been filed, the corporation should develop its Bylaws. These serve as the corporation’s internal manual, providing details on the governance of the corporation. Bylaws typically outline the roles and duties of directors and officers, procedures for appointing and removing directors, rules for holding meetings and issuing stock, and other relevant operational details.
Illinois law also requires corporations to maintain accurate records. These include a list of current shareholders, copies of recent annual reports, minutes of shareholder and director meetings, and records of any actions taken by the board or shareholders without a meeting. These records should be kept at the principal place of business.
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.
Lastly, an annual report needs to be filed with the Secretary of State’s office every year to maintain the corporation’s good standing status.
Our Chicago Business Attorneys
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. Our business attorneys 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.