How to Convert Illinois Corporation to LLC | The Ultimate Guide

Convert Illinois Corporation to LLC

When it comes to business structures, corporations and limited liability companies (LLCs) are two of the most popular options in Illinois. Each business structure has advantages and disadvantages, so business owners must choose the best fit for their needs. There may come a time when a corporation realizes that converting to an LLC would be more beneficial. This comprehensive guide will walk you through Converting Illinois Corporation to an LLC, discussing the reasons for conversion, the steps involved, and any potential challenges you may face.

Webinarcare Editorial Team will help you easily understand the conversion process, so you must be guided by all the factors gathered in this article.

Understanding Corporation and LLC in Illinois

Understanding the differences between corporations and LLCs in Illinois is essential for aspiring business owners and entrepreneurs. Both business structures offer distinct advantages and disadvantages, and comprehending their characteristics is crucial in making informed decisions.

Corporation

A corporation is a legal entity separate from its owners, known as shareholders or stockholders. It provides limited liability protection to its owners, meaning shareholders’ personal assets are typically shielded from company debts or liabilities. Corporations in Illinois have the advantage of being able to issue stock to raise capital, making them an attractive choice for businesses seeking significant investment opportunities. However, corporations also come with additional formalities, such as regular shareholder meetings and extensive record-keeping requirements.

Limited Liability Company (LLC)

A limited liability company (LLC) is a flexible business structure that combines the advantages of both corporations and partnerships. LLCs offer limited liability protection to their owners, called members, shielding their personal assets from business debts or lawsuits. Unlike corporations, LLCs do not require as many formalities as regular meetings or extensive record-keeping. This aspect makes LLCs more suitable for small businesses or entrepreneurs who prefer a less burdensome administrative and compliance structure.

Understanding the distinctions between corporations and LLCs is crucial to determine which structure aligns best with your business goals, resources, and needs in Illinois. By evaluating liability protection, taxation, ownership structure, and operational flexibility, entrepreneurs can make confident decisions when establishing their business entity in Illinois.

It is suggested that you speak with a legal professional before you begin converting your Illinois corporation to an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Illinois.

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How to Convert Illinois Corporation to an LLC

Converting a corporation to an LLC in Illinois involves several steps, which may vary depending on Illinois laws and regulations. Here is an outline of the steps required to convert Illinois corporation to an LLC:

Step 1: Research and Understand the Conversion Process

Before embarking on the conversion process, it’s crucial to research and understands the specific requirements and steps involved in converting a corporation to an LLC in Illinois. Familiarizing yourself with the relevant state laws, regulations, and necessary forms or filings will help ensure a smooth transition. 

The Illinois Secretary of State will often have valuable information about the conversion process, including required forms, fees, and filing procedures. Look for sections related to business entity conversions and corporation dissolution. In converting to an LLC, hiring an LLC Service in Illinois is best since it provides guidance and assistance.

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Step 2: Obtain Shareholder Approval

The second step in converting Illinois corporation to an LLC is obtaining approval from the corporation’s shareholders. This typically involves holding a shareholder meeting and voting on a resolution to approve the conversion. Be sure to review the corporation’s bylaws to ensure that the proper procedures are followed.

Step 3: Prepare and File a Plan of Conversion

Illinois requires that a Plan of Conversion be prepared and filed with the Illinois Secretary of State. This document outlines the terms and conditions of the conversion, including the name and structure of the new LLC, the conversion’s effective date, and any other relevant information. 

In terms of naming your Illinois LLC, you must adhere to the following when choosing your LLC’s name:

  • The name must include “Limited Liability Company,” “LLC,” or “L.L.C.
  • The name cannot include words or phrases that imply the company is engaged in activities it is not authorized to conduct.
  • The name must be distinct from other registered businesses in Illinois.

In Illinois, if you do not wish to file your LLC right away but want to hold the name that you have decided on, then you can reserve your LLC name for 90 days. You must file a name reservation application with the Illinois Secretary of State to keep the name. 

You can register your business under a different legal name if your preferred name isn’t available. Once you have chosen a name, you can submit an application for Illinois DBA (doing business as). In this manner, you can choose any name you desire for your business. A DBA allows a company to operate under the name of the person or entity who owns it. If you have decided to file for a DBA, you can file it in three methods, online, by mail, and in person filing.

However, before filing a DBA, you should know that you need to renew your DBA every Indefinite, which costs $50.

Be sure to review Illinois’s specific requirements for a Plan of Conversion, Or you can hire the Best Illinois Registered Agent Services for easier processing. 

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Step 4: File Articles of Organization for the New Illinois LLC

Along with the Plan of Conversion, you must file the Articles of Organization in Illinois for your new LLC. This document establishes the new LLC that includes information such as the LLC’s name, Registered Agent, and management structure. 

For your LLC name, you must check the availability of your desired LLC name by searching the Illinois Secretary of State Corporation/LLC Search‘s website.

Regarding your Registered Agent, he must receive and forward legal and tax documents on behalf of your LLC, such as service of process, state tax notification, and filing Annual Report. Your Registered Agent must have a physical address in Illinois and be available during regular business hours. The cost of Registered Agent in Illinois ranges from $50 – $200.

With all of the information included in the Articles of Organization, you must pay the filing fee of $150, which you can pay with the Illinois Secretary of State.

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Step 5: Prepare the Operating Agreement

While not always required by state law, it’s a good idea to draft an operating agreement for the new Illinois LLC. This document outlines the LLC members’ roles, responsibilities, ownership percentages, and other important operational details.

The operating agreement should include the following:

  • The roles and responsibilities of members and managers
  • The process for admitting or removing members
  • The allocation of profits and losses among members
  • The procedure for making major decisions
  • The process for dissolving the LLC

Step 6: Notify Creditors and Other Interested Parties

Inform creditors, vendors, and other interested parties of the Illinois corporation’s conversion to an LLC. This can help ensure a smooth transition and maintain good relationships with those involved in your business.

Step 7: Update Tax Information

After converting to an LLC, you must update your tax information with the Internal Revenue Service (IRS) and the Illinois Department of Revenue. This includes obtaining a new Employer Identification Number (EIN) for the LLC and updating any tax accounts or registrations.

To obtain an EIN for your Illinois LLC, you can apply online on the IRS website, by mail, or by fax. The online application process is the fastest and most convenient method, as you will receive your EIN immediately upon completing the application. There is no fee to obtain an EIN.

The application of an EIN in Illinois can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

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As an LLC in Illinois, your business may be subject to various state taxes and licenses, depending on the nature of your operations. Common taxes and licenses include:

  • Sales Tax: If your LLC sells taxable goods or services, register for Illinois sales tax permit and collect sales tax from your customers.
  • Employer Taxes: If your LLC has employees, you may be required to register for Illinois unemployment insurance and workers’ compensation coverage.

To ensure you comply with all applicable Illinois tax and licensing requirements, you can check out the Illinois Department of Revenue and Illinois Small Business Taxes for more information.

Step 8: Update Licenses and Permits

Depending on the nature of your Illinois business, you may need to update or obtain new licenses and permits for your LLC. Check with the appropriate local, state, and federal agencies to ensure your LLC complies with all necessary regulations.

Reasons for Converting Illinois Corporation to an LLC

When considering the conversion of a corporation to a limited liability company (LLC) in Illinois, it is essential to understand the potential advantages that this change in business structure may provide. Here are some common reasons for converting Illinois corporation to an LLC:

  • Tax Flexibility: One of the primary reasons Illinois business owners opt to convert their corporation to an LLC is the tax benefits. While corporations are subject to double taxation, where the company’s income and the shareholder’s dividends are taxed, LLCs are considered pass-through entities. This means the business’s income passes through to the owners’ personal tax returns, avoiding double taxation.
  • Simplified Management Structure: Another advantage of an LLC over a corporation is its simplified management structure. Illinois Corporations have a more complex structure with shareholders, Three directors, and officers, while an LLC is managed by its members or designated managers. This can make decision-making and operations more straightforward for small businesses.
  • Reduced Administrative Requirements: Illinois LLCs generally have fewer administrative requirements than corporations, such as lower Annual Report fees and less stringent record-keeping rules. This can save Illinois business owners time and money, allowing them to focus more on growing their businesses.
  • Personal Asset Protection: Both corporations and LLCs offer limited liability protection, meaning the business’s debts and liabilities are separate from the owner’s personal assets. However, some business owners may prefer an LLC’s specific liability protections over a corporation.

Challenges and Considerations

When converting a corporation to an LLC in Illinois, it is essential to consider the potential challenges and implications of the conversion process. Here are some challenges and considerations to keep in mind:

  • Tax Implications: Although converting Illinois corporation to an LLC can offer tax benefits, it’s essential to consider the potential tax implications of the conversion. In some cases, the IRS may treat the conversion as a taxable event, which could result in additional taxes being owed. Consult with a tax professional to understand the tax implications of converting your corporation to an LLC in Illinois.
  • Legal and Financial Advice: Converting Illinois corporation to an LLC can be a complex process, and it’s essential to seek legal and financial advice to ensure that the conversion is done correctly in the business’s best interests.
  • Timing: Converting Illinois corporation to an LLC can take time, particularly if there are regulatory approvals or other requirements to be met. Be prepared for the conversion process to take several weeks or even months to complete.

Benefits of Converting Illinois Corporation to an LLC

Converting a corporation to a limited liability company (LLC) can benefit business owners. These advantages can include:

  • Tax Flexibility: One of the primary benefits of converting Illinois corporation to an LLC is the potential tax advantages. While corporations are subject to double taxation (the company’s income and the shareholder’s dividends are taxed), LLCs are generally considered pass-through entities for tax purposes. This means the business income passes through to the owners’ personal tax returns, avoiding double taxation.
  • Personal Asset Protection: Both corporations and LLCs offer limited liability protection, meaning the business’s debts and liabilities are separate from the owner’s personal assets. However, some business owners may prefer the specific liability protections provided by an LLC over a corporation, depending on the nature of their business and the potential risks involved.
  • Increased Flexibility in Profit Distribution: Unlike Illinois corporations, which typically distribute profits according to the percentage of shares owned, LLCs can offer more flexibility in profit distribution among members. This can be particularly advantageous for businesses with multiple owners who contribute differently to the company’s success.
  • Potential for Easier Transfer of Ownership: Depending on the specific rules and regulations in Illinois, transferring ownership of an LLC may be easier than transferring ownership of a corporation. This is an important consideration for business owners who plan to sell or transfer their business.

While the benefits of converting Illinois corporation to an LLC can be significant, it’s essential to carefully consider the potential challenges and implications of the conversion process.

FAQs

Can an Illinois corporation be converted to a limited liability company?
Yes, it can be converted to an Illinois limited liability company (LLC).
What is the process for converting an Illinois corporation to an LLC?
The process for conversion includes filing articles of organization with the Illinois Secretary of State and obtaining new EIN and tax ID numbers for the LLC.
Is there a fee for converting an Illinois corporation to an LLC?
Yes, there is a fee for filing the articles of organization and other necessary documents.
Will the corporation’s liabilities be transferred to the new LLC after conversion?
No, the Illinois corporation’s liabilities will not be transferred to the new LLC after conversion.
What are the benefits of converting an Illinois corporation to an LLC?
The benefits of conversion include reduced administrative and tax obligations and increased flexibility in management and ownership.
Is it possible to keep the same name for the LLC after conversion?
Generally, yes, as long as the name is available and meets the requirements for LLC names in Illinois.
Are the shareholders of the corporation automatically members of the new LLC after conversion?
No, the shareholders of the corporation do not automatically become members of the LLC after conversion.
Do members of a converted LLC have limited liability for the entity’s debts and obligations?
Yes, members of an Illinois LLC have limited liability for the entity’s debts and obligations.
Can a converted LLC continue to operate under the corporation’s bylaws?
No, the bylaws of the corporation will not be applicable to the converted LLC.
Is there any potential tax liability for the corporation or its shareholders upon conversion to an LLC?
There may be tax consequences, and it is advisable to consult with a tax professional before converting.
What happens to the corporation’s existing contracts and agreements after conversion?
The existing contracts and agreements generally remain in effect unless otherwise stated.
Is it possible to convert a nonprofit Illinois corporation to a nonprofit LLC?
No, Illinois does not authorize the formation of nonprofit LLCs.
Is it possible to convert a foreign (out-of-state) corporation to an Illinois LLC?
Yes, it is possible to convert a foreign corporation to an Illinois LLC as long as the conversion is authorized under the laws of the foreign corporation’s state of formation.
Is there a specific form for converting an Illinois corporation to an LLC?
Yes, the conversion paperwork includes filing articles of organization and a statement of conversion.
Can the same individuals serve as LLC officers as previously served as corporation directors?
Yes, the same individuals can serve as LLC officers if they are otherwise able to serve as members or managers under the LLC’s operating agreement.
Will the corporation’s tax status change after conversion to an LLC?
Yes, the corporation’s tax status will generally change from being taxed as a C-corporation to being taxed as a pass-through entity.
Will the conversion affect the corporation’s credit history?
No, the corporation’s credit history should be preserved.
How long does it generally take to complete the conversion process?
The time it takes to complete the process can vary depending on the complexity of the corporation and the promptness with which all required documentation is provided.
How often do LLCs need to file annual reports in Illinois?
Illinois LLCs are required to file annual reports each year with the Secretary of State.
Is there a different tax rate for LLCs in Illinois compared to other corporate entities?
There is no separate tax rate for Illinois LLCs, as they are generally taxed as pass-through entities.
Can converted LLCs hold shareholder meetings?
Converted LLCs are not required to hold shareholder meetings, but they can do so if provided for in the LLC’s operating agreement.
Do LLCs have to keep formal meeting minutes?
LLCs are not required to keep formal meeting minutes, but it is generally a good idea to do so as a matter of good corporate governance.
Can converted LLCs issue stock as a corporation could?
No, LLCs issue ownership interests to members rather than stock available to the general public.
Do converted LLCs need to file initial reports?
Yes, all newly formed LLCs in Illinois must file an initial report with the Secretary of State.
Are LLCs required to have a registered agent in Illinois?
Yes, Illinois LLCs are required to have a registered agent with a physical address in the state.
Do LLCs need to receive approval from shareholders or members before making certain decisions?
This depends on the terms of the existing or newly adopted operating agreements and applicable law.
Is a separate EIN or tax ID number required for a converted LLC?
Yes, a new EIN or tax ID number is required for the LLC.
Is a certified copy of the articles of conversion required to obtain an EIN for the newly created LLC?
Yes, a certified copy of the articles of conversion may be required to obtain an EIN for the newly created LLC.
What is the process to convert an Illinois corporation to a limited liability company?
The process typically includes filing documents with the Illinois Secretary of State.
How long does it take to complete the conversion process?
The timeframe varies, but it typically takes a few weeks to a few months to convert from a corporation to an LLC in Illinois.
What are the advantages of converting from a corporation to an LLC in Illinois?
Some of the potential advantages include reduced liability exposure, simplified management structure, and more flexible taxation options.
Are there any disadvantages to converting to an LLC in Illinois?
Certain tax benefits associated with being a corporation may not be available to an LLC.
Can any Illinois corporation convert to an LLC?
Generally, yes. However, it is important to consult with legal counsel to understand the specifics of your situation.
Will my Illinois corporate branding change if I convert to an LLC?
It depends on how you choose to handle the branding during the conversion process.
Do I need to publish an announcement of the conversion in Illinois?
It depends on the details of your conversion. It is best to consult with an attorney to understand the specifics.
Will my Illinois corporate bylaws be transferable to an LLC?
It is unlikely that your existing bylaws will be effective for an LLC. You will need to adopt a new LLC operating agreement.
Can I form an LLC as a subsidiary of my Illinois corporation?
Yes, this is a common strategy when engaging in a corporate conversion.
Can I convert back from an Illinois LLC to a corporation?
Yes, it is possible. However, it is important to understand the cost and complexities of the process.
How will my ownership interest in an Illinois LLC differ from my ownership interest in an Illinois corporation?
LLCs generally provide more flexibility in ownership structure.
Will my corporation’s contracts still be enforceable after the conversion to an LLC in Illinois?
In most cases, your contracts will still be valid and enforceable after conversion.
Will my Illinois LLC be able to continue my existing corporate tax status?
It depends on your situation, but it may be possible to continue certain tax statuses after conversion.
Do I need to get approval from my corporation’s shareholders before converting to an LLC in Illinois?
Depending on your corporate governance structure, yes, obtaining shareholder approval may be required.
Will I still need to file annual reports with the state of Illinois after converting to an LLC?
Yes, Illinois LLCs are required to file annual reports.
Can I keep my Illinois corporation’s existing EIN when I convert to an LLC?
Generally, no, since an LLC is considered a new entity.
What happens to my Illinois corporation’s debts and liabilities during the conversion process?
The corporation’s debts and liabilities do not transfer automatically to the LLC. However, legal counsel can help you navigate any outstanding issues.
Will my Illinois LLC pay taxes the same way my corporation did?
Not necessarily, one of the advantages of an LLC is more flexibility in tax treatment.
How does the ownership structure of an Illinois LLC differ from that of a corporation?
An LLC typically structures ownership through a membership / operating agreement while corporations rely on a shareholder agreement and designations of many classes and types of stock.
Can I convert a foreign corporation to an Illinois LLC?
It is possible, but additional steps may be necessary.
Can the conversion of an Illinois corporation to an LLC protect me personally from lawsuits against the business?
Generally speaking, an LLC structure can limit personal liability of the individuals associated with the business.
Can the conversion of an Illinois corporation to an LLC impact my Illinois sales tax nexus?
It could, but the specifics of your situation can be evaluated by an attorney.
Can I still raise funds through equity if my Illinois corporation becomes an LLC?
Yes, investors can purchase ownership interests (often referred to as ‘membership interests’) in an LLC.
What is the cost to convert an Illinois corporation to an LLC?
The cost will vary based on the specifics of the situation, including legal fees and filing expenses with the Illinois Secretary of State.
Can my Illinois corporation’s IP rights transfer to my LLC?
Intellectual property ownership can be reviewed during the conversion, but transfer of ownership of some of the assets will require some appropriate legal documentation.
Do I need to cancel my Illinois corporation before filing for conversion to an LLC?
Generally, it is not necessary to cancel a corporation prior to conversion to an LLC.
Are there any regulatory compliance issues that should be considered when converting an Illinois corporation to an LLC?
Compliance with existing regulations related to the corporation’s governance structure will need to be accounted for when switching to an LLC
Can I still run my Illinois business operations under the same business name after conversion to an LLC?
It is possible; registering for an assumed name (also called a “d/b/a name” takes a few registrations, including a name reservation through the State of Illinois.

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Conclusion

Converting Illinois corporation to an LLC can offer significant benefits for your business, including tax flexibility, simplified management, and reduced administrative requirements. However, it’s essential to carefully consider the potential challenges and implications of the conversion process. Following the steps outlined in this guide and seeking professional advice, you can successfully convert your corporation to an LLC and position your business for continued success.

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