How to Start an S-Corporation in Illinois (2024 Guide)

Start an S-Corporation in Illinois

If you want to start an LLC in Illinois, there are things that you should consider. Illinois is the home to a thriving business community, making it an attractive location for entrepreneurs. One popular business structure is the S-Corporation, which offers several tax and operational advantages. This comprehensive guide will explore the process of starting an S-Corporation in Illinois, including the costs, steps, advantages, and disadvantages associated with this business structure.

Webinarcare Editorial Team will help you gain knowledge through thorough research and market study. Before starting your S-corp, all the steps in this article must guide you.

What is an S-Corporation?

An S-Corporation is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. This tax treatment allows S-Corporations to enjoy pass-through taxation, meaning the corporation’s income, deductions, and credits flow through to the shareholders, who report this information on their individual tax returns. This structure helps to avoid the double taxation experienced by C-Corporations.

An S corporation (S corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other companies. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

Limitations and Requirements of S-Corp

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

You can apply for an S-Corp in Illinois if qualified for the limitations and requirements.

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How to Form an S-Corporation in Illinois?

To create S-Corp in Illinois, you must follow the below guidelines that include forming a business name, hiring a Registered Agent, filing your Articles of Organization, creating an operating agreement, requesting an EIN, and filing a form 2553.

Step 1: Register a Business Name in Illinois

After you have decided on the idea to start an S-Corp in Illinois, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an S-Corp, there is a complete guide on Illinois Business Name Search for a proper business name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in Illinois.
  • Limit of restricted words that need a license in Illinois
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hire a Registered Agent

The next step in starting an S-corp in Illinois is hiring a Registered Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence. Forming an LLC with an S-corp will be easier if you have Registered Agent in Illinois.

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Step 3: File For Articles of Organization

The Articles of Organization is an important document to start your limited liability company (LLC). Illinois Articles of Organization is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. For the Articles of Organization to be filed in IN Secretary of State, you need to pay a filing fee of $150. In Illinois, the filing fee of forming an LLC is $15.

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Step 4: Creating an Operating Agreement

After you have filed your Articles of Organization, the next step is to create an operating agreement in Illinois. The operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following:

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure.

Step 5: Request for an EIN

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

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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Step 6: File Form 2553 for your S-Corp Business

Once you have obtained your EIN and Articles of Organization to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or at most 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS.

In Illinois, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734.

Costs of Forming an S-Corporation

There are several costs associated with forming an S-Corporation in Illinois, including:

  1. Filing Fees: When forming a corporation in Illinois, you must file Articles of Incorporation with the Illinois Secretary of State and pay a filing fee of $150 for filing in-person and by mail.
  2. Statement of Information: After forming the corporation, you must file a Statement of Information (Form SI-550) within 90 days and pay a filing fee (currently $25). This statement must be filed annually after that.
  3. Franchise Tax: S-Corporations in Illinois are subject to the annual franchise tax, which is the greater of a minimum tax (currently $800) or a calculated tax based on the corporation’s net income.
  4. Other Costs: Depending on the nature of your business, additional costs may include obtaining licenses and permits, registered agent services, and professional fees for legal and accounting services.

Advantages of Forming an S-Corporation

There are numerous advantages to incorporating an S-Corp, but you should be aware of certain problems. Consider the following benefits of an S corporation:

Pass-through Taxation

S-Corporations enjoy pass-through taxation, which helps to avoid the double taxation faced by C-Corporations. This can result in potential tax savings for shareholders. Pass-through taxation is a tax system where the income, deductions, and credits generated by a business entity, such as Illinois General Partnership, limited liability company (LLC), or S-Corporation, are passed through to individual owners or shareholders instead of being taxed at the corporate level.

In this system, business profits and losses are reported on the owners’ or shareholders’ individual tax returns, and taxes are paid at their individual income tax rates. This avoids the issue of double taxation, which occurs in C-Corporations where income is taxed at both the corporate level and again when distributed to shareholders as dividends. Pass-through taxation is generally advantageous for small businesses and their owners, as it simplifies tax filings and often results in lower overall taxes.

Limited Liability Protection

Shareholders of an S-Corporation have limited liability protection, meaning their personal assets are protected from the corporation’s debts and obligations. Limited liability protection in an S-Corporation refers to the legal separation between the personal assets of the shareholders (owners) and the business assets, which protects shareholders from being personally responsible for the company’s debts and legal obligations.

In an S-Corporation, shareholders’ personal assets, such as their homes, cars, and personal savings, are not at risk if the business faces financial difficulties or lawsuits. The shareholders’ liability is limited to the amount they have invested in the company. This limited liability is a significant advantage of incorporating a business as an S-Corporation, as it provides a safeguard for the personal financial well-being of the business owners.

It is important to note that limited liability protection can only be supported if the shareholders maintain proper corporate formalities, such as keeping separate business and personal finances, holding regular shareholder meetings, and maintaining accurate business records. In such cases, courts may “pierce the corporate veil” and hold shareholders personally liable for the company’s debts and obligations.

Transferability of Shares

Shares in an S-Corporation are more easily transferable than those in an LLC, allowing for greater flexibility in ownership changes. Transferability of shares in an S-Corporation refers to the ability of shareholders to sell, gift, or otherwise transfer their ownership interest in the company to another person or entity. This is an important aspect of an S-Corporation’s structure, as it allows for flexibility in ownership and the potential for raising capital through the sale of shares.

However, there are certain restrictions on the transferability of shares in an S-Corporation, which are imposed by the Internal Revenue Service (IRS) to maintain the company’s eligibility for S-Corp status:

  • Shareholders: The number of shareholders in an S-Corporation is limited to a maximum of 100. Only individuals, certain trusts, and estates can be shareholders; other corporations and partnerships are generally not allowed.
  • Eligible Shareholders: Only U.S. citizens and resident aliens can be shareholders in an S-Corporation. Non-resident aliens are not allowed to hold shares.
  • One Class of Stock: S-Corporations can only have one class of stock. All shares must have the same rights and privileges, such as voting rights and distribution preferences. However, differences in voting rights are allowed if they are not tied to economic rights (e.g., distribution preferences).
  • Perpetual Existence: Perpetual existence refers to the concept that a business entity, such as an S-Corporation, can continue to exist indefinitely, regardless of changes in ownership or management. This means the corporation can outlive its original founders and shareholders and continue to operate even if individual shareholders pass away or decide to sell their shares.

This characteristic of an S-Corporation provides stability and continuity for the business, as it ensures that the corporation’s operations, contracts, and legal obligations remain unaffected by changes in ownership. It also makes it easier for the company to attract investors and raise capital. Potential investors can be confident that the business will continue to exist even if the original owners are no longer involved.

Disadvantages of Forming an S-Corporation

Despite these advantages, moving to an S corporation only sometimes makes sense – or at the very least, necessitates a thorough review of certain situations. The following issues may arise in particular:

Restrictions on Shareholders

S-Corporations are subject to specific restrictions, such as a maximum of 100 shareholders and limitations on the types of eligible shareholders (e.g., only individuals, certain trusts, and estates).

Single Class of Stock

S-Corporations are limited to issuing only one class of stock, which can limit flexibility in raising capital or creating different ownership structures. A single class of stock in an S-Corporation refers to the requirement that the corporation only issues one type of stock with equal rights and characteristics for all shareholders. This means that all shares of stock must have the same economic rights, such as dividend distribution preferences and liquidation rights, as well as voting rights. The single class of stock requirement is one of the key criteria the Internal Revenue Service (IRS) sets for a corporation to qualify for S-Corp status.

Increased Complexity

Forming and maintaining an S-Corporation requires more paperwork, record-keeping, and compliance with state and federal regulations than simpler structures like LLCs.

Franchise Tax

S-Corporations in Illinois are subject to the annual franchise tax, which can financially burden some businesses.

In an Illinois S-Corporation context, the franchise tax is usually based on the company’s income, net worth, or a combination of both. Since S-Corporations are pass-through entities for federal income tax purposes, meaning that their income is not taxed at the corporate level but rather passed through to individual shareholders, they may be exempt from or subject to lower franchise tax rates in some states than traditional C-Corporations.

However, S-Corporations must still comply with Illinois franchise tax requirements, which may include annual filings and tax payments. It is crucial for S-Corporation owners to understand the specific rules and regulations in their state of operation and to consult with a tax professional to ensure compliance and minimize their tax.

FAQs

How do I incorporate my business in Illinois?
In order to incorporate a business in Illinois, you must file articles of incorporation with the Secretary of State.
What is an S-corporation in Illinois?
In Illinois, an S-corporation is a type of business entity that is organized as a corporation and taxed as a pass-through entity.
Can any type of business be an S-corporation in Illinois?
No, not all businesses are eligible to be taxed as S-corporations in Illinois.
What are the advantages of forming an S-corporation in Illinois?
Some of the advantages of forming an S-corporation in Illinois include reduced taxation, limited liability, and increased eligibility for certain grants and loans.
What are the disadvantages of forming an S-corporation in Illinois?
Some of the disadvantages of forming an S-corporation in Illinois include increased complexity and expense, as well as greater regulatory requirements.
Is there a minimum number of shareholders required to form an S-corporation in Illinois?
Yes, in Illinois, an S-corporation must have at least one but no more than 100 shareholders to qualify for S-corporation status.
How long does it typically take to form an S-corporation in Illinois?
The timeline for forming an S-corporation in Illinois can vary, but it typically takes several weeks to several months.
How much does it cost to form an S-corporation in Illinois?
The cost to form an S-corporation in Illinois varies depending on various factors, such as the complexity of the process and the services you require.
Do I need to have a business plan in order to form an S-corporation in Illinois?
No, a business plan is not required to form an S-corporation in Illinois. However, it can be a helpful tool to have as you navigate the process of starting a new business.
Do I need to obtain a bank account before forming an S-corporation in Illinois?
No, you are not required to have a bank account before forming an S-corporation in Illinois. However, you will likely need to have one established soon after the business is formed.
Can I change my business structure from a different type of entity to an S-corporation in Illinois?
Yes, it is possible to change your business structure to an S-corporation in Illinois, but it requires filing new paperwork with the state.
Do I need to obtain any licenses or permits before forming an S-corporation in Illinois?
The licenses and permits required to start a business vary depending on the industry and location. It’s important to research and obtain any required licenses or permits before starting your business.
Are there any age restrictions on forming an S-corporation in Illinois?
No, there are no age restrictions on forming an S-corporation in Illinois.
How do I maintain S-corporation status in Illinois?
To maintain S-corporation status in Illinois, you must file an annual tax return and meet various other requirements.
What is the Illinois corporate income tax rate for S-corporations?
In Illinois, S-corporations are taxed at the personal income tax rates instead of the corporate income tax rates.
Are S-corporations in Illinois required to make estimated tax payments?
Yes, S-corporations in Illinois are required to make estimated tax payments throughout the year.
Can S-corporations in Illinois qualify for any tax incentives or credits?
Yes, depending on the industry and location, S-corporations in Illinois may be eligible for certain tax incentives and credits.
Do S-corporations in Illinois need a registered agent?
Yes, S-corporations in Illinois are required to have a registered agent with a physical address in the state.
Can an individual serve as the registered agent for an S-corporation in Illinois?
Yes, an individual can serve as the registered agent for an S-corporation in Illinois as long as they have a physical address in the state.
Can an S-corporation in Illinois operate in multiple states?
Yes, an S-corporation in Illinois can operate in other states, but it will likely need to register as a foreign entity in each state where it does business.
Do I need to file any additional paperwork with the state after forming an S-corporation in Illinois?
S-corporations in Illinois may need to file additional paperwork with the state, such as annual reports or amendments to the articles of incorporation.
Can I hire employees for my S-corporation in Illinois?
Yes, S-corporations in Illinois are allowed to hire employees.
What is the maximum number of employees an S-corporation in Illinois can have?
There is no maximum number of employees for an S-corporation in Illinois.
Can an S-corporation in Illinois issue dividends to shareholders?
Yes, S-corporations in Illinois can issue dividends to shareholders.
What is the liability protection for shareholders of an S-corporation in Illinois?
Shareholders of an S-corporation in Illinois generally have limited liability for the debts and obligations of the business.
Can I dissolve an S-corporation in Illinois?
Yes, S-corporations in Illinois can be dissolved by filing the necessary paperwork with the state.
Will dissolving an S-corporation in Illinois affect the personal liability of shareholders?
Dissolving an S-corporation in Illinois may affect the personal liability of shareholders, as they may become responsible for any outstanding debts or obligations of the business.
What is an s-corporation in Illinois?
An s-corporation in Illinois is a business entity that is taxed like a partnership but provides the limited liability protection of a corporation.
What are the benefits of starting an s-corporation in Illinois?
The benefits of starting an s-corporation in Illinois include limited legal liability, favorable taxation, easier access to funding, and increased credibility with customers and partners.
How much does it cost to start an s-corporation in Illinois?
The cost to start an s-corporation in Illinois varies by state and business type. Illinois filing fees are $150.
What is the process of starting an s-corporation in Illinois?
The process of starting an s-corporation in Illinois involves filing articles of incorporation with the Secretary of State.
What is required to start an s-corporation in Illinois?
The requirements to start an s-corporation in Illinois include creating a corporate name, filing articles of incorporation, designating corporate officers and directors, and obtaining tax identification numbers.
Can a s-corporation be started by a single individual in Illinois?
Yes, a single individual can start an s-corporation in Illinois without any other partners.
What is the Illinois Secretary of State responsible for in regards to s-corporations?
The Illinois Secretary of State is responsible for filing the articles of incorporation, assigning corporate entity numbers, and maintaining corporate records for s-corporations.
How long does it take to start an s-corporation in Illinois?
The timeline for starting an s-corporation in Illinois can vary depending on the receipt of the necessary paperwork and approvals, but typically takes between 1-2 weeks.
How do I choose a corporate name for an s-corporation in Illinois?
An s-corporation in Illinois must have a unique and distinguishable name that is not already being used by another business.
Can two or more individuals start an s-corporation in Illinois?
Yes, two or more individuals can start an s-corporation in Illinois by filing articles of incorporation with the Secretary of State.
Am I required to pay taxes on my s-corporation earnings in Illinois?
Yes, s-corporation earnings in Illinois are subject to the state corporate income tax rate.
Are there any annual reporting requirements for an s-corporation in Illinois?
Yes, s-corporations in Illinois are required to file an annual report with the Secretary of State and pay an annual franchise tax.
Is an Illinois s-corporation required to have a registered agent?
Yes, s-corporations in Illinois are required to have a registered agent to receive legal and tax documents.
Can an s-corporation be owned by a nonresident of Illinois?
Yes, an s-corporation in Illinois can be owned by nonresidents.
What is a shareholder agreement and is it required for an s-corporation in Illinois?
A shareholder agreement is a legal agreement among the shareholders of a corporation. It is not required but is typically recommended for s-corps.
How do I obtain a tax identification number for an Illinois s-corporation?
An Illinois s-corporation can obtain a tax identification number from the IRS by filing Form SS-4.
Can an s-corporation switch to a regular c-corporation in Illinois?
Yes, an s-corporation in Illinois can choose to switch to a regular c-corporation by filing Form 1120S with the IRS.
What is the maximum number of shareholders allowed in an Illinois s-corporation?
An Illinois s-corporation can have a maximum of 100 shareholders.
How are shareholders in an Illinois s-corporation taxed?
Shareholders in Illinois s-corps are taxed on their individual tax returns based on their proportionate ownership of the business.
Are Illinois s-corporations liable for sales and use taxes?
Yes, Illinois s-corps are subject to sales and use taxes if they have taxable sales.
Can an Illinois s-corporation have non-voting shareholders?
Yes, Illinois s-corps can have non-voting shareholders, but they must be treated equally with voting shareholders in regards to stock valuation, dividends, and distributions.
What is the tax rate for an Illinois s-corporation compared to a regular c-corporation?
The tax rate for Illinois s-corps is based on personal tax rates, and regular c-corps are subject to a 7 percent state income tax.
Can an s-corporation in Illinois issue stock?
Yes, s-corporations in Illinois can issue stock to raise capital and pay dividends to shareholders.
Can an Illinois s-corporation hire employees?
Yes, s-corporations in Illinois can hire employees and must provide proper compliance for HR, Employee Benefits and Compensation, and Employment Taxes and Reporting.
Does an s-corporation in Illinois require a board of directors?
There is no requirement for Illinois s-corps to have a board of directors, but it is common practice for governance.
How frequently are board meetings required for an s-corporation in Illinois?
There are no statutory requirements for board meetings in Illinois but must be practiced periodically to address governance issues.
Can an Illinois s-corporation raise capital through investors outside of the state?
Yes, Illinois s-corps are not restricted by geographical location when raising capital.
What is the statute of limitations for filing a claim for an Illinois s-corporation?
The Illinois statute of limitations for an s-corporation is five years for breach of contract from their original date and for any tax audit review in three years.

Also Read

Why You Should Start Illinois S Corp

One of the main benefits of forming an S Corp is the potential tax advantages. Unlike traditional C Corporations, S Corps are pass-through entities, meaning that profits and losses pass through to the shareholders who report them on their personal tax returns. This can result in potential tax savings, as S Corps are not subject to double taxation like C Corps. Additionally, S Corps may qualify for special tax deductions and credits that can further reduce their tax liability.

In addition to tax benefits, forming an S Corp can also provide liability protection for the business owners. By creating a separate legal entity, shareholders are shielded from personal liability for the debts and obligations of the corporation. This means that personal assets such as homes, cars, and savings are generally protected from business creditors. This can provide peace of mind to entrepreneurs knowing that their personal assets are separate from the business.

Another advantage of starting an S Corp in Illinois is the flexibility it provides in terms of ownership and management structure. S Corps can have up to 100 shareholders, allowing for greater diversity in ownership. Moreover, S Corps can have different classes of stock, which can be useful for raising capital or rewarding key employees through stock options. Additionally, S Corps can have a more informal structure, making it easier to manage and operate the business.

Furthermore, forming an S Corp can enhance the credibility and reputation of a business. S Corps are recognized as separate legal entities and may be perceived as more established and reliable than sole proprietorships or partnerships. This can be beneficial when attracting investors, customers, and suppliers, as well as when seeking business loans or contracts.

Lastly, starting an S Corp can provide a clear framework for the future growth and sustainability of the business. S Corps have perpetual existence, meaning that the business can continue to operate after the death or departure of a shareholder. This can ensure continuity and stability for the business, facilitating long-term planning and growth.

In conclusion, starting an S Corp in Illinois can offer numerous advantages for entrepreneurs looking to establish and grow their business. From tax savings and liability protection to flexibility in ownership and management, forming an S Corporation can provide a solid foundation for success. Consider consulting with a legal or financial advisor to determine if an S Corp is the right choice for your business goals and objectives.

Conclusion

Forming an S-Corporation in Illinois can be a beneficial decision for small business owners seeking liability protection, pass-through taxation, and easier transfer of ownership. By meeting the requirements set by the IRS and following the necessary steps, business owners can take advantage of an S-Corp’s unique structure and benefits. However, it is essential to consider the potential drawbacks, such as increased paperwork and limitations on ownership, before making a final decision. Consulting with a legal or financial professional can help business owners determine if an S-Corporation is right for their needs and goals.

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