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How to Form an LLC in Illinois

Limited Liability Company (LLC) is a business entity that many small businesses choose as a way to organize themselves when they are just getting started. An LLC has a few advantages for small businesses but may not be appropriate for larger ventures or startups that are seeking investors. In addition, LLCs have a unique business structure that can get very technical.

You should look closely at other business entities like partnerships and S and C Corporations, before launching an Illinois LLC.

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Advantages of LLCs in Illinois:

  • Limited personal liability for members for business debts and lawsuits.
  • Fewer reporting and recordkeeping requirements than other kinds of entities, including corporations.
  • Avoiding the double taxation—business and personal-- of corporations if taxed as a pass-through entity.
  • Illinois LLCs do not pay an annual fee or file an annual report.

Disadvantages of LLCs:

  • An LLC is not a good investment vehicle for outside investors.
  • LLCs and corporations pay commercial activity taxes, unlike sole proprietorships and partnerships.
  • LLC owners may pay self-employment taxes.

Step-By-Step: Forming an Illinois Limited Liability Company

With all of that, you have decided to form an LLC in Illinois. You have your members, your business plan, and a little startup capital, and you are on your way to start an LLC.

Here is a step-by-step guide for how to create a fully operational Illinois LLC.

Special Rule 1: Foreign LLCs

Any LLC that wants to do business in Illinois must register with the Secretary of State. A foreign LLC must appoint a registered agent (with a physical Illinois address) for service of process purposes.

Special Rule 2: Low-Profit Limited Liability Company

Illinois recognizes the low-profit limited liability company (L3C) which is a variation on the LLC. This version is only available to for-profit entities whose main purpose is to achieve a socially beneficial objective.

Step I: Name Your LLC

Creating a legally proper LLC name and then protecting it is one of the first actions in LLC formation. This is a process that can be complex and time-consuming, but it is essential for the LLC to operate legally in Illinois.

The first thing you have to do is create a great name (that's up to you). Illinois law requires that the name be unique and different from any other company's name.

The name must contain the one of suffixes “limited liability company": L.L.C."; “LLC"; or "L3C" if the entity is organized as a low-profit limited liability company. The name cannot contain any other business entity indication, like “Co." “Corp."; etc.

So your first task will be to search the Secretary of State Business Services Name Database to make sure that your chosen name isn't already used for an existing business.

Step II: Appoint a Registered Agent

The State of Illinois requires an LLC to appoint a registered agent for service of process before formally filing with the state. A registered agent is designated to receive process (legal documents) on behalf of the LLC. An Illinois registered agent can be an individual or a company (domestic or foreign), but it must have a physical Illinois street address. A forming LLC will often choose a professional registered agent service or may choose the company lawyer.

Step III: Legally Protect Your Business Name

Next, make sure that no one else can use it in business or on the internet. This means that you have to make sure that no one else is using that name. You do this by doing a name search to make sure that the Internet Domain Name is available. If it is available, grab it immediately (that will only cost a few dollars).

If you want to do business nationally, or you want to operate in several other states, you should trademark the nonprofit's name with the United States Patent and Trademark Office (USPTO). This process takes some time and money. The name is still protected as a common law trademark while that application is pending.

Once you receive your federal trademark, apply to the Illinois Secretary of State to register it as an Illinois trademark or service mark. You may also trademark the name with just the state, without a federal trademark.

Now that name is yours, you can keep anyone else from using it, and it conforms to Illinois law.

Step IV: Structure the Business

An LLC has a particular, unique business structure.

To begin with, the stakeholders of an LLC are called “members." There is no stock issued, so they cannot be “stockholders." This is the primary reason that an LLC is not a good investment vehicle for either the founders or potential investors.

There is no number of members required. You can have a single-member LLC-- say, for a one-person office.

There are also professional LLCs, called a PLLC, that are structured for professional offices like lawyers, doctors, accountants, etc. If your business requires a separate license (doctor, lawyer, etc.), you must obtain a copy of that license from the Illinois Department of Financial and Professional Regulations and include that license in your Articles of Organization.

Secondly, an LLC can be (and should be) governed by an “Operating Agreement." This is similar to but different from, “bylaws," “charters," or other forms of corporate organization. Illinois does not require an Operating Agreement but most LLCs will have one.

The LLC operating agreement is a private business formation contract among the members/business owners. It is not filed with the state, but it is an important part of forming an LLC. It should include the following points, according to the Small Business Administration:

  • Percentage of members' ownership
  • Voting rights and responsibilities
  • Powers and duties of members and managers
  • Distribution of profits and loses
  • Holding meetings
  • Buyout and buy-sell rules (procedures for transferring interest or in the event of a death)

An LLC may be managed by the members, or it may hire an outside manager.

Step V: Write and File Your Articles of Organization With The State

You are now ready to compose and file your LLC Articles of Organization as your business registration with the Illinois Secretary of State Department of Business Services. Most Articles of Organization can be filed online, but there are some exceptions.

Foreign LLCs cannot use this form. They must register separately, as noted above.

Your LLC Articles of Organization documents must contain the following information:

  • The name and the principal place of business address of the LLC;
  • The name and address of the LLC's registered agent;
  • The purpose of the LLC;
  • Statement regarding the duration of the LLC;
  • The structure of the LLC: (manager-managed or member-managed); and
  • Names/addresses of the initial managers or initial members.
  • $150 filing fee; $100 fee for expediting the process.

After You File Articles of Organization

You will have numerous state and federal requirements for your new LLC after you file with the state.

Annual Reporting Requirement

After you have formed your Illinois LLC, you must file an annual report as part of the maintenance of the LLC. The report must be filed each year on the anniversary month of the LLC's formation.

State Business Licenses

Certain kinds of businesses must be licensed with the State of Illinois. The state has a list of these. Check with local authorities about local business licensing. The City of Chicago has its own set of license requirements.

State Employer Filing Requirements

Your LLC will be subject to state rules if it has employees—even if the employees are also members.

First, all employees must be registered with the Illinois Department of Employment Security within 20 days of hire.

Next, you must register with the Illinois Workers' Compensation Commission.

And last, you must establish an unemployment insurance account with the Illinois Department of Employment Security.

Business Taxes

You will be subject to both state taxes and federal income taxes. This is a job for your accountant, but here is a brief outline of your tax obligations.

All Illinois LLCs and foreign LLCs authorized to do business in Illinois must register with the Illinois Department of Revenue (DOR) for all tax purposes, including income, sales tax, and use taxes. Register through the MyTax Illinois portal.

You will be subject to both federal withholding tax if you have employees and, of course, to business income taxation.

You must file to receive an IRS Federal Employer Identification Number (FEIN) on the Internal Revenue Service website if you will have employees. You must also apply for your FEIN if the LLC has more than one member. You will be subject to all federal tax withholding rules.

In addition, because of the structure of an LLC (versus a corporation), you will be paying federal self-employment income taxes, unless you choose to be taxed as a corporation.

LLCs also have very specific requirements for filing tax returns. If you choose to be taxed as a pass-through organization, then the individual members file individual taxes.

Help Is Available

Any new business venture, including an LLC, will need legal help. Fortunately, forming an LLC in Illinois can be a straightforward process with FindLaw's Business Formation Service. For further assistance, contact an Illinois business and commercial lawyer. And enjoy your Illinois LLC!

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