Business-Entity-ComparisonIllinois Business Entity Comparison

Here’s a quick review of the different forms that Illinois business organizations may take.

Sole Proprietorships

The sole proprietorship requires no formalities, no documents to execute, and no separate bank accounts or tax returns. It is legally one and the same with the owner and is the simplest way to begin to do business.  Depending on the type of business, however, the owner may be required to obtain licenses and permits, or file a certificate of doing business under an assumed name.

Having no separate legal identity from its owner, the sole proprietorship will not shield the owner from any business-related liability. The sole proprietor whose employee injures someone or is injured while on the job, or who incurs debts in the course of operating the business, will be personally liable for those matters, whether or not the business remains in existence.  Sole proprietors whose business presents a risk of tort, contract, employment, or other liability, therefore, should strongly consider purchasing insurance.

Illinois Corporations

Incorporating presents the business owner with the alternative of creating a separate legal entity, the Illinois corporation, to conduct business as a separate “person” under the law.  The corporation may own the business property, employ workers, and earn income, which is taxable at the corporate rate.

It can raise money, or capital, for the business, by issuing and selling share of stock, the purchasers of which then become shareholders in the corporation but do not participate directly in the corporation’s business.  It can also reward its employees by including stock or options to purchase stock at favorable prices as part of their compensation.  Additionally, the corporation can incur debts and other obligations and may sue or be sued.

The corporate form presents the business’ owners with an excellent means of shielding their personal assets from liability as well as facilitating the business’s continuation beyond its original owner’s retirement or death.  The many advantages of organizing a business as a corporation come with expenses and duties of observing corporate formalities.  These formalities include making the required filings, including articles of incorporation with the Illinois Secretary of State, or with another state in accordance with its corporate statute.

A corporation must also elect officers and directors.  These officers and directors need not own any part of the business but have a fiduciary duty to act in the best interest of the corporation and its shareholders, hold annual meetings, keep minutes of those meetings, maintain corporate records and bank accounts for corporate business, and make sure it has adequate capital to conduct its business.Commingling corporate funds with individual funds may result in “piercing the corporate veil” for liability purposes and the business’s income may impute its individual operators instead of the corporation itself.  Furthermore, distributed corporate earnings are taxed twice: to the corporation and to the individual shareholders upon distribution.

Illinois Statutory Close Corporation

Existing corporations may elect to become close corporations under the Business Corporations Act.  Under this election, the shareholders may operate the corporation directly without a board of directors.

Illinois Professional Service Corporation

Some professional businesses, including law firms, opt to organize as Illinois professional service corporations, denoted by letters “PC” after the business’s name.  These corporations are governed by the Professional Service Corporation Act.  Only professionals licensed by the state, the US Patent Office, or the Internal Revenue Service to practice the profession for which the business is organized may be officers, directors, shareholders, or employees of professional service corporations, except for “ancillary personnel.”

Members of professional service corporations remain fully personally liable for any negligent or wrongful acts or misconduct they or personnel under their direct supervision and control commit while rendering services, but are not liable for the independent acts of their fellow professionals.  The corporation itself, however, will be liable for any wrongful acts of any of its personnel, just like any business corporation.

For the start-up or small business today, the Illinois limited liability company is overwhelmingly the preferred choice of business entity because of its flexibility, limitation of liability, and reduced formalities.

Illinois Partnerships

Governed by the Uniform Partnership Act, a general partnership is an association of two or more persons (individuals, corporations, or other legal entities) that conduct a business for profit as co-owners. Partnerships are legal entities and may own property, enter into contracts, and sue or be sued.  They must also file tax returns and partnership income is also taxable to the individual partners.  Liability in a general partnership is expansive, for both the partnership and personally for each individual partner,  for the wrongful acts or business debts incurred by other partners, partnership employees, and agents of the partnership.

Business partners are, of course, well advised (though not required) to enter into a partnership agreement that sets forth their respective duties and shares of income and expenses.  Though all partners owe a fiduciary duty to one another and to the partnership, partnership agreements are private and flexible documents closely tailored to suit the partners’ business interests.Partnerships need not file the partnership agreement or any other formal document with any government agency.  Like a sole proprietorship, they may be required to file certificates of doing business under an assumed name.

Limited partnerships, while very similar to general partnerships, may better suit the needs of some business operators and investors.  Limited partnerships must have at least one limited partner and formed by filing a certificate with the Secretary of State.  The general partners are responsible for operating the business just as are general partners in general partnerships.

Like shareholders of a corporation, the limited partners typically provide capital for the business and receive a percentage of the business’s profits but do not actively participate in it and are liable for the business’s debts and losses only to the extent of their investment.  The limited partnership’s profits are not retained by or taxed to the entity, but are distributed to the partners and taxed at their respective individual rates.

Illinois Limited Liability Partnerships

The limited liability partnership (LLP) is governed by Article 10 of the Uniform Partnership Act.  A partnership may become a limited liability partnership by filing a state of qualification with the Secretary of State.  Though similar in many respects to the general partnership, partners in an LLP are not personally liable for the negligence or wrongful acts of other partners.

Illinois Limited Liability Company

Governed by Illinois Limited Liability Company Act, the limited liability company (LLC) blends elements of the corporation and the partnership, making it attractive to the majority of business owners.  An LLC is created by filing articles of organization, similar to articles of incorporation, with the Secretary of State.  Business owners structuring LLCs may define virtually all aspects of the LLC company’s management structure in its operating agreement, a private document that is not filed with any state agency and is similar to corporate bylaws or a partnership agreement. Matters addressed in the operating agreement include how the LLC will be managed; whether the members will hold periodic meetings; what the members’ compensation and rights and responsibilities are toward the LLC and toward each other; and under what circumstances the LLC will be dissolved.

Members are shielded from personal liability for the company’s debts to the same extent as shareholders in corporations.  The LLC is presumptively treated as a partnership for tax purposes, but may make be taxed as a corporation by filing form 8832 with the IRS or as an S corporation by filing form 2553.