If you have a business and are not incorporated, you are personally liable for all debts and claims made arising from the business operations. If a claim were to exceed your insurance coverage, the claimant could attach your house and your personal assets. Isolating your personal assets from the claims of business creditors is the principal reason to incorporate.
The first decision the business owner needs to make is which state to incorporate in. Generally there is no advantage for most businesses to incorporate in any other state than where the business is located. If you incorporate in another state, i.e., Delaware, and are doing business in Illinois, you must register in Illinois as a “foreign corporation”. You will pay the same fees as if you were an Illinois corporation.
The second decision is whether to form a corporation or a limited liability company (LLC). That decision is largely driven by the nature of the business and the individuals involved.
An Illinois for profit corporation is the most frequently used method to achieve liability insulation. To complete a corporation, we must do several things. First, we verify the name you have selected is available. Because the Secretary of State will not incorporate a new business whose name is identical to or deceptively similar to an existing corporation, we recommend you have a first choice name and a second choice name.
We then complete Articles of Incorporation. This document identifies who the incorporators are, the registered agent, the number of shares authorized, shares to be issued and the purpose of the corporation. These are submitted to the Secretary of State with the filing fee.
After the Articles of Incorporation are returned to us, usually 5 to 10 days, we record the Articles of Incorporation with the County Recorder, apply for the corporation’s Federal Employer Identification Number (FEIN), order the corporate minute book and seal and file a sub-chapter S election, (if appropriate), with the IRS.
The FEIN (Federal Employer Identification Number) is the equivalent of the corporation’s social security number. It is required to open bank accounts, file tax returns, etc.
Corporate Minute Book
The corporation is required to hold an annual shareholders’ meeting and an annual board of directors’ meeting. The purpose of the shareholders’ meeting is to elect directors of the corporation. Directors are the policy makers of the corporation. Directors must meet annually. At the annual meeting, the directors elect the officers of the corporation – president, secretary, etc. It is the officers who conduct the day to day business of the corporation. In a small closely held corporation, the same person is frequently the shareholder, director and officer. The minutes of the meeting are kept in the corporate minute book. It also contains the By-laws of the corporation and the stock certificate(s).
Sub-Chapter S Election
Most corporations elect to pay taxes as a “Sub-S” Corporation. Unless this election is made, the corporation will pay taxes and the shareholders will pay taxes. To avoid this double taxation, most corporations file the “Sub-S” election. With this election, the corporation merely files an informational return on March 15 reporting any profits as a pass through to the shareholders. A more simple way to understand this is that the business will have the protection of a corporation and the shareholders will pay taxes as individuals. This “Sub-S” election, however, has one major limitation – all shareholders must be U.S. citizens. If any of the shareholders are not U.S. citizens, your choice is limited to a Limited Liability Company.
Limited Liability Company
The Limited Liability Company (LLC) is the newest form of doing business. The LLC enabling legislation became effective in Illinois in September of 1992. The LLC is a combination of a corporation and a partnership. It is the most expensive to create because we have to file documents with the Secretary of State (as we would for a corporation) and prepare an operating agreement (as we would for a partnership). The filing fees are also greater than a corporation. However, the use of an LLC has specific advantages in certain circumstances. If the business is in real estate purchase, development or investment, the LLC has definite advantages. If the LLC owners, called members, need a flexible profit distribution arrangement, the LLC operating agreement can accommodate this need.
The advantage of the LLC is that it can have a flexible management structure like a partnership without the liability of a partnership. In a partnership each partner is personally liable for all of the debts of the partnership. This is called joint and several liability. In an LLC each member is liable only to the extent of the contribution to the LLC. This is the same as a stockholder risk in a corporation.
Not for Profit Corporation
It is frequently said, “This corporation was not intended to be a not-for-profit corporation, it just turned out that way.” If, however, there is a need for a not-for-profit corporation, we can assist.
When is a not-for-profit (NFP) needed? The traditional application is for charitable or religious entities and homeowner or condominium associations. NFP’s are also used for social clubs, sportsmen’s clubs, professional study groups, etc.
The formation of an NFP is similar to the creation of a corporation in that Articles of Incorporation are filed with the Secretary of State. Filing fees are much less.
If the purpose of the NPF is charitable, we then register with the Illinois Attorney General and if a charitable exemption is desired, we file a 501(3)(c) application with the IRS.
Our office has represented clients in all areas of corporations, LLC and NFP. We would be happy to review your options. If you have any questions, please contact our office.