This post concludes my series on Illinois business organizations. Other posts in the series have covered sole proprietorships, general partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), and limited liability companies (LLCs). Early in the series, I also discussed how business organizations are taxed by the federal government. Today, I provide an overview of corporations in Illinois.
Corporations are among the oldest forms of business organizations. While the format has changed somewhat to keep up with the changing times, many of the rules that corporations must follow remain mired in archaic formalities that set it apart from the other business organizations I’ve discussed. But more about that in a moment.
Formation: Corporations are formed when one or more incorporators file articles of incorporation with the Illinois secretary of state. The articles of incorporation must be accompanied by a filing fee and initial franchise tax. The base filing fee is $150. The initial franchise tax is equal to the greater of 0.15% (i.e., $1.50 for every $1,000) of the paid-in capital or $25. Paid-in capital is the amount that the corporation receives in exchange for the shares it issues.
The articles of incorporation must contain certain basic information about the corporation, including the corporation’s name, the purpose for which the corporation is formed, the name and address of each incorporator, and information about the shares the corporation is authorized to issue. They may also include additional provisions about the corporation, some of which must be included in the articles to be effective at all.
Liability Protection: In general, corporate shareholders and directors are not personally liable for the corporation’s obligations. But unlike LLCs, control over a corporation is not protected against its shareholders’ personal creditors. If a creditor seizes a shareholder’s shares in a corporation, the creditor takes all the rights attendant to those shares, including any rights to receive dividends or vote. Proper planning can mitigate these risks, but it requires business owners to be proactive.
Formalities: Corporations are subject to more formalities than the other business organizations I’ve discussed so far. Like LLCs, LPs, and LLPs, corporations must maintain an agent for service of process in Illinois. It must also keep certain business records and make them available to shareholders and directors. And it must file an annual report (along with a $75 filing fee) and pay an annual franchise tax. The annual franchise tax is equal to 0.10% ($1.00 per $1,000) of paid-in capital, with a minimum of $25.00 and a maximum of $2,000,000. Additional paid-in capital for each year is taxed at a rate of 0.15% ($1.50 per $1,000).
In addition, Illinois corporations are subject to even more formalities, including:
- The incorporators or shareholders must hold an organizational meeting to elect a board of directors if the initial directors were not named in the articles of incorporation. Then, the board of directors must meet to adopt bylaws (unless earlier adopted by the shareholders) and electing officers.
- The business and affairs of the corporation must be managed by a board of directors.
- The directors or shareholders must adopt bylaws, which govern the internal affairs of the corporation. For other business organizations, the partnership agreement or operating agreement—which are the equivalent of corporate bylaws—isn’t legally mandated, though it’s a bad idea to go without it.
- The shareholders must hold annual meetings.
Variation – Close Corporations: In some circumstances, close corporations may qualify to be treated as close corporations under Article 2A of the Illinois Business Corporations Act. Close corporations are given more flexibility than other corporations in terms of the formalities I’ve listed above. For example, in a close corporation, the corporate business can be managed directly by the shareholders, without a board of directors.
As always, this discussion only scratches the surface of the law as it relates to this particular form of business organization. I hope you’ve found it helpful as you consider what kind of business organization is best for your business. But remember, if you’re planning to start a business organization, you need to hire a lawyer. Please call me, and I’ll be happy to help you select the optimal structure for your needs.