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