Chicago Business Lawyer
I am a Chicago business lawyer and Chicago CPA. Business lawyers often form Illinois LLCs, draft asset purchase agreements or stock purchase agreements, and dissolve LLCs and corporations. The below information focuses on llinois LLCs and Illinois S corporations.
Cost. How much does it cost to form an Illinois Limited Liability Company (Illinois LLC or LLC)? Chicago business lawyers typically charge $500-$900. Some business lawyers charge by the hour to form an Illinois LLC with a complicated structure or operating agreement. In addition, the Illinois Secretary of State charges $500 ($614.10 for online filing and expedited service) to file articles of organization for an Illinois LLC.
Benefits. Limited personal liability is one of the primary benefits of an LLC. If a business operates as a sole proprietorship or partnership, the owners face unlimited personal liability.
Formation. How is an Illinois LLC formed? Your business lawyer files articles of organization with the Illinois Secretary of State. However, the articles of organization do not address the LLC’s internal governance matters.
Governance. The operating agreement is the principal governing document of an LLC. The operating agreement contains the agreement of the LLC members (and managers, if any) relating to the internal governance of the LLC. An LLC’s operating agreement is a private agreement and is not filed with the Illinois Secretary of State’s office. The Illinois Limited Liability Company Act governs relations among the members, managers, and company not addressed in the operating agreement. An operating agreement may modify any provision of the Illinois Limited Liability Company Act, except as provided 805 ILCS 180/15-5(b).
Taxation. LLCs do not pay income taxes. Instead, the income and loss flows through to the members’ personal income tax returns. Single-member LLCs are disregarded entities for IRS tax purposes (unless an S corporation election has been made). As such, single-member LLCs report the income or loss on Form 1040, Schedule C. Multiple-member LLCs file income tax return Form 1065. However, an LLC may elect S corporation taxation and file federal Form 1120S.
Allocations of Income and Loss. The allocation rules of Internal Revenue Code Section 704(b) apply to an LLC taxed as a partnership (rather than as a sole proprietorship or S corporation). Generally, members may allocate income and loss among the members any way they choose to as long as the allocation has substantial economic effect. For example, members who provide capital to the business can receive a preferential return, similar to interest, or a return of their capital before any distributions to members who do not provide capital.
Federal Income Tax Returns. For 2016 tax year and subsequent years, tax returns are due and taxes are payable on the 15th day of the third month after the end of the company’s fiscal year.
Illinois S Corporations
Cost. How much does it cost to form an Illinois S corporation? Again, Chicago business attorneys typically charge $500-$900. Some business lawyers charge by the hour to form an S corporation with a complicated corporate structure or corporate bylaws. In addition, the Illinois Secretary of State charges $175 ($281 for expedited service) to file articles of incorporation for an Illinois corporation.
Benefits. As noted above, limited personal liability is one of the primary benefits of the corporate form.
Formation. How is an Illinois S corporation formed? A business lawyer files articles of incorporation with the Illinois Secretary of State, requests an Employer Id Number from the IRS and then elects S-corporation tax status with the IRS.
Governance. However, the articles of incorporation do not address internal governance matters. Corporate bylaws address corporate governance matters.
Corporate Formalities and Restrictions. The limitations and restrictions regarding S corporations, include the following:
1. No more than 100 shareholders ;
2. Only qualified shareholders – an S corporation is permitted to have only certain types of shareholders including individuals who are US citizens or residents, estates, certain types of trusts, charitable organizations, pension plans, and individual retirement accounts.
3. One class of stock – each share of the corporation’s stock must have the same rights to distributions and liquidation proceeds, although differences in voting rights among classes of stock do not constitute an impermissible second class of stock.
4. Shareholder consent – all the shareholders must consent in writing to the election to be an S corporation.
5. Qualified entities – restrictions limit the types of corporate entities that may elect S status (neither insurance companies nor financial institutions that use the reserve method of accounting for bad debts can be S corporations).
Most of the foregoing restrictions and requirements do not apply to Limited Liability Companies.
Taxation. A corporation that has elected S corporation status by filing Form 2553 is taxed as a pass through entity and files its federal income tax return on IRS Form 1120S. This is an informational tax return – the gains and losses pass through to the individual shareholders’ returns. C corporations pay taxes as a separate legal entity. In addition, the shareholders pay taxes on any dividends. Thus, C corporations suffer from “double taxation.”
Allocations. An S corporation is permitted only one class of stock . However, it may have both voting and nonvoting common stock. An S corporation must treat each share of stock the same with respect to allocations of income, loss and distributions. Therefore, an S corporation cannot provide a preferential allocation of income, loss or distribution to any shareholder.
Federal Income Tax Returns. An S corporation must usually take a calendar year-end date unless the corporation can establish a reasonable business purpose for a different year-end date. For 2016 tax year and subsequent years, S corporation and LLC tax returns are due and taxes are payable on the 15th day of the third month after the end of the company’s fiscal year. Therefore, an S corporation or LLC with a fiscal year-end date of December 31 must file its tax return and pay taxes by March 15 of the following year.
S Corporation tax returns. What business and financial records do I need to provide?
1. Financial statements (Income Statement & Balance Sheet);
2. Capital accounts – complete transaction history and summary statement of each shareholder’s capital account; and
3. Shareholder information – shareholder name, address, and social security number.
Contact Chicago business lawyer Brian J. Thompson to form your Illinois LLC or Illinois S corporation. For general information on Illinois small business law and formation, visit Illinois Department of Commerce Small Business Assistance .