How to Incorporate in Illinois vs. How to Start an Illinois LLC

A Guide to Choosing the Best Business Entity in Illinois

Are you an entrepreneur interested in starting a business in Illinois? You’ve probably realized one of the most important decisions you’ll make is which business structure you should choose for your new business. The most common business entities in the country are the Limited Liability Company (LLC) and corporation, and have as many differences as they do similarities. This Illinois LLC and incorporation guide will help you to understand both business structures so you can make the right choice for your business. Here you’ll learn the specifics of starting an LLC and a corporation, what to expect with their annual upkeep, and the advantages and disadvantages of both entities.

After figuring out which business structure suits your needs best, your next step is hiring Active Filings to get you where you need to be in the quickest amount of time. Our starter package begins at $25 (plus state fees). Hire us and you’ll quickly understand why Active Filings is America’s most reliable business incorporation service.

 

Hire us to form your LLC or Corporation in Illinois!

LLCs vs. Corporations

You can base your answer off of the main characteristics true of all LLCs and corporations:

  • Maintenance
    A corporation requires a high level of maintenance, including annual upkeep and taxes. Corporations are strict, and have legal obligations and formalities like electing a board of directors, holding shareholder meetings, and maintaining internal records such as meeting minutes and stock issuance. Conversely, LLCs only require a minimal amount of maintenance. LLCs require little paperwork, have flexibility in decisions, and low annual upkeep. An LLC will be the best choice if you have a small to medium-sized business and can only handle a low amount of maintenance.
  • Tax structure
    LLCs have less tax-related paperwork, beings it is not a separate taxable entity from its owners and members. LLCs are pass-through tax entities, where income and losses pass through the business and onto the members to report on their personal income tax return. For higher income LLCs, the tax rate is usually lower than a corporation. Corporations default to a tax structure called a C corporation, and require more tedious and complex paperwork. The C corporation is known for what’s called double taxation, where a business’s net income is taxed initially by a corporate tax, and then taxed again on personal income, after shareholders receive their profits and losses (dividends). C corporations are typically taxed at a lower rate on profits, have tax deductibles such as health care and travel, and and can retain its earnings to be reinvested into the company’s growth.
  • Potential investors
    Corporations are ideal for gaining investors. Investors are more comfortable investing their money in a traditional and reputable business structure like a corporation. Investors don’t have to worry about complicating their personal taxes when they invest in a corporation, and only get taxed on profits actually distributed to them. Investors view corporations as a dependable business structure that will provide them with a return on their investment. Having a corporate structure will profoundly impact the ability to raise investment money. In contrast, investors can own a percentage of an LLC. Owners of LLCs will have to pay taxes on their distributive shares, even if they haven’t received a distribution on those profits, and can’t issue stock, which is a turn-off for many investors. Consider a corporation if you are serious about gaining investors.
  • Prestige in the title
    Having the “LLC” or “Inc” ending on your business name gives it a level of prestige. These endings show permanence and encourage trust from potential investors or clients. The appearance of a business starts with its name, and while both entities provide a level of prestige, incorporating provides a higher level of prestige for your business, since the corporation is the oldest and most traditional entity type. Keep in mind the LLC has surpassed corporations in popularity in most states, and their prestige will continue to grow.

 

IL LLCs vs. IL Corporations

After walking through the general characteristics between LLCs and corporations, next is to dig into specifics of why an Illinois LLC or Illinois corporation would be better for your business. Each state has its own set of statutes and tax laws that govern the way its businesses operate, and these unique details should be taken into consideration when choosing your business entity. The information in this section will provide these specifics for the Illinois LLC and the Illinois corporation.

  • Illinois Corporate Income Tax
    Illinois has a flat corporate net income tax rate of 7%, and is imposed on all corporations earning or receiving income in the state of Illinois. This rate ranks about average compared to corporate taxes across the US, and is in combination with a separate corporation franchise tax and personal property tax, creating a high overall amount of taxes to end up being paid annually for corporations. Consider the potential taxes if you are serious about forming a corporation.
  • Additional Illinois Corporation Franchise Tax
    Corporations in Illinois are subjected to an annual franchise tax based on their net worth for the privilege of doing business as a corporation in Illinois. The tax is .15% of paid-in capital for the previous year, and each year afterwards the tax is .10% for the previous year, plus .10% of the basis. There is a $25 minimum as well.
    Unlike most states, this tax is in addition to the corporate income tax, instead of in lieu of it. This extra tax should be taken into consideration when considering a corporate entity.
  • Illinois Personal Property Replacement Tax (PPRT)
    Illinois imposes a personal property replacement tax on the net income of corporations and LLCs. This tax varies depending on your business entity:
    C corporations: 2.5%
    LLCs: 1.5%
    Most states do not impose this property replacement tax on corporations, and should be taken into consideration when choosing business entities.
  • Illinois Personal Income Taxes
    Unlike most states, the current personal income tax rate in Illinois is a flat 4.95%. This rate is advantageous for an LLC, especially higher-income LLCs, since it leads to paying less on annual taxes as well as more simplicity around tax season.
  • Illinois LLC Interest Foreclosure Vulnerability
    LLCs in Illinois are not protected as well as LLCs in most states, and creditors can go one step further and order a foreclosure on an LLC. In most states, creditors have one remedy against the debtor of an LLC, which is a charging order that puts a lien on a debtor’s interest (funds and assets) and creditors then have a right to receive any distributions made to the debtor from the LLC, if the LLC makes a distribution. For Illinois LLCs, this same charging order and lien can be placed, except a court can also “order a foreclosure of the interest” (805 ILCS 180/30-20) on the LLC.

 

Illinois LLC or Illinois Corporation? Final Answer.

Choosing between an Illinois LLC or Illinois corporation as your business entity comes down to considering the size of your business, level of maintenance you require, priority of investors, and the most beneficial tax structure for the future of your business.

The Illinois LLC is the best bet for small to medium-sized businesses. LLCs in this state are less expensive and tedious to form and maintain than corporations, and provide easy management, flexibility and liability protection. Illinois LLCs stay true to design in their low maintenance and simple tax structure. If investors are not one of your top priorities, and you’re looking for liability protection for your business, the LLC is your answer.

The Illinois corporation is the answer if your business will be growing substantially and investors will be key for that growth, and you have the means for the amount of paperwork required. An Illinois corporation remains true to character in its extra paperwork, steps to start and maintain, and involved yet beneficial tax structure.

How to Incorporate in Illinois

In order to start a corporation in Illinois, also known as incorporating, you must file the Articles of Incorporation with the Illinois Secretary of State.
You can file the Articles of Incorporation in the following ways:

  • Online at the Illinois Secretary of State website (recommended)
  • By postal mail

The state of Illinois charges a $150 filing fee for the Articles of Incorporation, plus an initial franchise tax with a minimum cost of $25 (can be higher depending on paid-in capital). There is a 10 day filing time, and an optional $100 expedite fee if you’d like your Articles of Incorporation to be reviewed within 24 hours.

To complete your Illinois Articles of Incorporation, you need to include the following information:

Your Illinois corporation’s name must contain the word “Corporation,” “Company,” “Incorporated,” “Limited,” or an abbreviation of those.

Your corporation name cannot already be in use, and cannot sound similar to the name of any other company in Illinois.

Enter your Illinois registered agent’s name and street address. All Illinois corporations are required by law to have a registered agent physically located in the state to accept service of process on behalf of the corporation.

If you hire Active Filings to form your Illinois corporation, we’ll provide a year of registered agent service for no additional charge and track all required maintenance filings to keep your corporation active, as well as provide a bevy of free online tools in your online Active Filings account.

Describe the purpose for forming your corporation.

List the classes, quantity, and value of the shares. In the technology industry, larger numbers of shares are more common, such as 10 million. Other industries use much lower numbers, such as 1,000 – 1,500 shares.

Describe the preferences, qualifications, limitations, restrictions, and special or relative rights in respect of the shares of each class.

List how many directors will constitute the initial board of directors.

Give the full names and addresses of each initial director.

Provide estimates of the value of the corporations property and the amount of business that will be transacted.

If there is any information you would like and are permitted to provide outside of required information, or that may not have been specified by the Articles of Incorporation, place it here.

List the name and complete street address of each incorporator in your corporation.

How to Start an LLC in Illinois

Forming an LLC in Illinois can be done by filing the Articles of Organization with the Illinois Secretary of State.

You can file the Articles of Organization in the following ways:

  • Online at the Illinois Secretary of State website (recommended)
  • By postal mail

There is a $150 filing fee to file your Articles of Organization. There is a 10 day filing time, and an optional $100 expedite fee if you’d like expedited services, which will file your documents in 24 hours.

To complete the Illinois Articles of Organization, you must include the following information:

Your Illinois LLC’s name must contain the term Limited Liability Company, LLC or L.L.C. Unlike most states, your name cannot contain any of the following terms:
• Corporation
• Corp.
• Incorporated
• Inc.
• Ltd.
• Co.
• Limited Partnership
• LP

Your LLC name can’t already be in use, and can’t include words that could confuse your business with a government agency. Restricted words, such as bank or university, may require additional paperwork to be accepted.

You must provide a physical address which may or may not be a place of business in the state of Illinois.

Choose whether your LLC will be effective on the filing date or a date within 60 days after the filing date.

Enter your Illinois registered agent’s name and registered office address. All Illinois LLCs are required by law to have a registered agent physically located in the state to accept service of process on behalf of the LLC.

If you hire Active Filings to form your Illinois LLC, we’ll provide a year of registered agent service for no additional charge and track all required maintenance filings to keep your corporation active, as well as provide a bevy of free online tools in your online Active Filings account.

State the character of the business objectives of your LLC.

Specify whether your LLC will exist perpetually or exist for a specified period of time.

List any further provisions elected by your LLC in the regulation of the internal affairs of the company not stated in the Articles of Organization.

List the names and business addresses of the managers and any member with the authority of manager.

Your organizer(s) must sign this area and provide their address. Your organizer can be a natural person age 18 or older, or a business entity.

Illinois Annual Report Requirement

Completing annual maintenance tasks and taxes will let your business maintain good standing and stay updated with the state of Illinois.
1. File your annual report
2. File your Illinois business taxes

Below, we’ve listed the instructions and resources you’ll need to help you take care of your annual maintenance.

What is an Illinois annual report?
Corporations and LLCs registered in Illinois are required to file annual reports with the Illinois Secretary of State. The report is meant to update or confirm the records for your business, and lets your business remain in good standing. You can update information such as business address, directors, officers, members, and managers using the annual report form.

How do I file an annual report in Illinois?
LLCs and corporations can file their annual reports at the Secretary of State website or by postal mail.

How much does it cost to file an annual report in Illinois?
For LLCs, the annual report fee is $75. For corporations, the annual report fee is $75 if filed through postal mail. Alongside the annual report fee, there is a $25 minimum franchise tax due. This franchise tax can fluctuate depending on your corporation’s paid-in capital.

When are Illinois annual reports due?
For LLCs and corporations, this report will be due every year before the first day of the anniversary month your LLC was created, and can be filed within 60 days of the due date.

Illinois Business Taxes

Illinois business taxes can be complex, and have more moving parts than other states. For corporations, the state imposes a corporate income tax, a corporate franchise tax, and a personal property replacement tax. For LLCs, the profits are only taxed on the owner’s or member’s personal taxes (plus the personal property replacement tax).

The filings can get complicated and you may need the help of a tax service or CPA to complete these requirements, but regardless of your accounting skills, we’re here to help get you started.

Take a look at our Illinois Business Tax FAQ below:

 

Illinois Corporate Income Tax

What’s the Illinois corporate income tax?

The Illinois Income Tax is a flat rate of 7%, imposed on every corporation earning or receiving income in Illinois.

What tax form does an Illinois corporation need to file?
A corporation must file Form IL-1120 for its corporate income tax return.

How can I file the Illinois corporate income tax?
A corporation can file their Illinois corporate income taxes at the Illinois Secretary of State website or by paper form return.

Illinois Personal Property Replacement Tax

What’s the Illinois Personal Property Replacement Tax?

Illinois imposes the Personal Property Replacement Tax (PPRT) on the net income of corporations and LLCs. This tax varies depending on your business entity:

C corporations: 2.5%

LLCs: 1.5%

What tax forms are used to file the Illinois Personal Property Replacement Tax?

Businesses will need to file Form IL-2569 for the PPRT.

How can I file the Illinois Personal Property Replacement Tax?

A business can file their Illinois PPRT at the Illinois Secretary of State website or by paper form return.

Illinois Annual Franchise Tax

What’s the Illinois annual franchise Tax?

Corporations in Illinois are subjected to an annual franchise tax based on their net worth for the privilege of doing business as a corporation in Illinois. The tax is .15% of paid-in capital for the previous year, and each year afterwards the tax is .10% for the previous year, plus .10% of the basis. There is a $25 minimum as well.

What tax forms are used to file the Illinois annual franchise tax?

This tax is filed and paid on the same document as the annual report (Form BCA 14.05).

How can I file the Illinois annual franchise tax?

The Illinois annual franchise tax can be filed by postal mail or at the Secretary of State website.

What tax forms does an Illinois LLC need to file?

For single member LLCs, submit a Schedule C in addition to your personal tax return.

For multi-member LLCs, submit Form 1065, along with Schedule K-1 included within the form.

When are my Illinois business tax returns due?

Illinois corporations must file their tax returns on or before the 15th day of the 3rd month following the close of the tax year. For calendar year taxpayers, this is March 15th.

Hire us to form your LLC or Corporation in Illinois!