Key Takeaways

  • To register an Illinois S corporation, you must first form a corporation or LLC in Illinois and then file IRS Form 2553 for S corp status.
  • Illinois S corps must file Articles of Incorporation with the Illinois Secretary of State and pay applicable fees.
  • Additional steps include obtaining an EIN, registering for state taxes, appointing a registered agent, and complying with annual reporting and state-specific requirements.
  • Limitations on shareholders and the single class of stock requirement apply.
  • S corps in Illinois offer liability protection, pass-through taxation, and capital-raising flexibility.
  • State and federal compliance, especially regarding shareholder qualifications and meeting formalities, is crucial.

An Illinois S corp is a corporation that chooses to pass all corporate income, deductions, losses, and credits through the shareholders for the purposes of federal taxes. Many entrepreneurs in the state of Illinois consider forming an Illinois S-corp due to its many advantages.

Illinois S Corporation: Overview

The Illinois S corporation is ideal for entrepreneurs who want to establish an organization with a formal structure like that of a corporation but with limited liability and pass-through taxation of the profits. 

An Illinois S corporation is a standard corporation that turns into an S corporation when the shareholders designate a special tax status with the IRS. Shareholders need to file the IRS Form 2553. This can only be done after the official documents are filed with the state.

Just like a C corporation, an S corporation is viewed as an individual entity by the law. An S corporation is viewed as separate from the owners and is often treated like a human being.

Shareholders of an Illinois S corporation enjoy limited liability when it comes to obligations, debts, and liabilities incurred by the corporation. The same is also true when it comes to liability stemming from legal action.

In general, shareholders are not able to lose more money than the amount they chose to invest in the corporation. In the event an S corporation goes bankrupt, the owners will not be held liable for its debts.

If someone sues an S corporation and the court finds the organization liable, the property of the corporation can be taken away to satisfy the judgment. However, if the property is not sufficient to satisfy the judgment, the personal assets of the shareholders cannot be taken away. Some examples of personal assets include the following:

  • A bank account
  • A home
  • A car

Important Points to Consider When Forming an Illinois S Corporation

In order to form an S corporation in the state of Illinois, official documents need to be filed with the state. Also, the state filing fees need to be paid in full.

The shareholders need to file Form 2553 to elect special tax status. This form needs to be filed with the IRS.

By law, an Illinois S corporation is viewed as an entity that is separate from its shareholders. When establishing an organization, shareholders interested in incorporating the organization into an S corporation should keep in mind that there are limitations when it comes to the type of businesses S corporations in Illinois are able to conduct.

The owners of an S corporation need to record minutes that document the meetings of the board of directors and the stockholders.

Illinois S corporations are not able to have a number of shareholders that exceeds 100. Shareholders are not allowed to be other corporations, partnerships, non-resident aliens, limited liability companies, or certain trusts.

Steps for Illinois S Corporation Registration

To begin the Illinois S corporation registration process, follow these core steps:

  1. Choose a Business Name: Ensure the name is unique and includes “Corporation,” “Company,” “Incorporated,” or an abbreviation thereof. Confirm availability via the Illinois Secretary of State’s database.
  2. File Articles of Incorporation: Submit Form BCA 2.10 to the Illinois Secretary of State either online or by mail. The filing fee is $150.
  3. Appoint a Registered Agent: This person or business must have a physical address in Illinois and be available during business hours.
  4. Create Corporate Bylaws: These internal rules guide corporate governance, though not required for filing, they are essential for formal operation.
  5. Hold an Organizational Meeting: Directors should adopt the bylaws, appoint officers, and issue stock.
  6. Obtain an EIN: Apply through the IRS website to get a federal Employer Identification Number.
  7. File IRS Form 2553: This elects S corporation status. It must be filed within 75 days of forming the business or the beginning of the tax year.
  8. Register with the Illinois Department of Revenue: Required if hiring employees or selling goods.
  9. File the Annual Report: Due before the first day of the corporation’s anniversary month. The fee is $75.

Limited Liability for Shareholders

Shareholders of Illinois S corporations usually enjoy limited liability. These shareholders cannot lose more money than the total they invested in the organization. 

The protection of the personal assets of shareholders is one of the main reasons why many business owners decide to incorporate. However, there are a few exceptions to this rule. For example, shareholders can be held personally liable in instances of fraud.

Ongoing Requirements to Maintain S Corporation Status

To stay compliant and preserve liability protection and S corporation tax status, Illinois S corporations must:

  • Maintain Good Standing: File the annual report and pay fees on time.
  • Hold Regular Meetings: Document director and shareholder meetings with accurate minutes.
  • File Annual Tax Returns: Submit both federal Form 1120-S and Illinois business tax filings.
  • Keep Accurate Records: Including bylaws, stock issuance, and major corporate decisions.

Failure to meet these responsibilities could lead to administrative dissolution or loss of S corp tax status.

Raising Capital for an S Corporation

In comparison to other types of businesses, S corporations often have an easier time getting additional capital. The reason for this is that the owners of S corporations can issue and sell stock as well as other forms of financial instruments to serve as evidence of interest.

In some cases, the sale of stock is subjected to both federal and state securities laws. Ownership of the corporation can be transferred via the process of selling stock. S corporations are only able to have a single class of stock. However, the voting rights of S corporations can differ.

Shareholder Limitations and Restrictions

To maintain S corporation status, Illinois businesses must comply with strict IRS shareholder requirements:

  • No more than 100 shareholders.
  • Shareholders must be U.S. citizens or residents; no non-resident aliens allowed.
  • Shareholders must be individuals, estates, or certain trusts. Other corporations, LLCs, or partnerships cannot own shares.
  • Only one class of stock is permitted, although differences in voting rights are allowed.

Noncompliance with these rules may cause the IRS to revoke S corp status, resulting in C corporation taxation.

Tax Implications for S Corporations

Usually, S corporations in Illinois are audited less frequently than partnerships and sole proprietorships. S corporations in Illinois enjoy the advantages of pass-through taxation. This means that the shareholders can avoid the dreaded double taxation that applies to C corporations.

Illinois-Specific Tax Considerations

Although S corporations are exempt from federal income taxes, they may still owe certain state-level taxes and fees:

  • Replacement Tax: Illinois S corporations must pay a 1.5% replacement tax on net income, which is in addition to federal pass-through taxation.
  • Annual Report Filing Fee: As part of maintaining good standing, a $75 annual report must be filed.
  • State Employment Taxes: If the S corp has employees, it must register for unemployment insurance tax and withhold payroll taxes.
  • Sales and Use Tax: If your corporation sells goods or taxable services, it must register for and remit Illinois sales tax.

Frequently Asked Questions

  1. What forms do I need to register an Illinois S corporation?
    You'll need to file Articles of Incorporation (Form BCA 2.10) with the Illinois Secretary of State and IRS Form 2553 to elect S corp status.
  2. Can an LLC elect S corporation status in Illinois?
    Yes, an LLC can elect S corp tax status by filing IRS Form 2553 after obtaining an EIN.
  3. How long does it take to form an S corp in Illinois?
    Processing times vary, but online filings with expedited service can be completed in as little as 24 hours.
  4. What taxes do Illinois S corporations pay?
    They are exempt from federal income tax but must pay a 1.5% Illinois replacement tax on income, plus applicable state employment and sales taxes.
  5. Can a non-resident alien be a shareholder in an Illinois S corporation?
    No. Only U.S. citizens or resident aliens can be shareholders in an S corporation.

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