S Corporation Illinois: Everything You Need to Know
Each S corporation Illinois must pay income tax, have at most 75 shareholders, and have special tax status from the Internal Revenue Service. 3 min read
Each S corporation Illinois must pay income tax, have at most 75 shareholders, and have special tax status from the Internal Revenue Service. Each state has its own stipulations when forming an S corporation.
S Corporation Owners
S corporations have restrictions on who can be a shareholder. Shareholders cannot be a:
- Limited liability company (LLC).
- Non-qualifying trust.
- Nonresident alien.
Business Income and Losses
LLCs and S corps have different methods of distributing owners' income and losses. LLCs, which are often taxed as partnerships, deal with Internal Revenue Code §704(b). This section lets owners allocate income or loss. You can determine allocations at the end of the year, depending on the LLC's operations.
Member distributions can also be flexible. Members that give capital might not get a return before distributions go out to members that didn't provide capital. Illinois LLCs are usually taxed as partnerships under Subchapter K, while S corporations are under Subchapter S.
When it comes to liquidation, S and C corporations receive the same treatment as taxable transactions. An S corporation's asset distribution is similar to a sale for its fair market value. Gains are allocated among shareholders, who must include that amount on their tax returns.
Points to Consider When Forming an S Corporation
- File official documents. Because an Illinois S corporation is separate from its shareholders, there are limitations on the type of business it can conduct. Keep minutes of meetings among the board of directors and stockholders.
- Pay filing fees. When you file IRS Form 2553, you must pay $275, which includes a $25 franchise tax fee, $150 filing fee, and $100 expedited fee. Payments must be on a credit card and include a 2.35 percent fee.
- Limited liability coverage. This is one of the main reasons owners incorporate in Illinois. Shareholders have limited liability and can't lose more than they invested. They also cannot be liable for legal judgments or debts against the S corporation.
- Raising capital. Illinois S corporations have easier access to capital because they can issue and sell stock. Because an S corporation can only have one class of stock, each share must get the same treatment in regard to the allocation of income, distributions, and losses.
- Taxation. Every corporation earning or receiving income in Illinois must pay income tax. Shareholders avoid double taxation because corporations file informational tax returns. Also, when the business pays Social Security and Medicare, it pays the taxes based on the self-employment tax rate, which is usually lower than that of a sole proprietor.
- Owner and employee limits. S corp owners are considered employees, so they receive certain benefits, such as group-tax-favored stock options as well as insurance, profit-sharing, and retirement plans.
How to Form a Corporation in Illinois
To form a corporation in Illinois, you must follow these steps:
- Choose a name, and file articles of incorporation. Your name must include the words Corporation, Company, Incorporated, Limited, Corp., Co., Inc., or Ltd. The incorporator must be at least 18 years old.
- Appoint a registered agent who has an in-state business address.
- Prepare corporate bylaws, and appoint initial directors.
- Hold a board of directors meeting, and issue stock to shareholders. All corporations filed online can only have one class of stock. Set forth the number of stock shares and compensation received for the shares.
- Comply with tax, regulatory, and annual reporting requirements.
With an S corporation in Illinois, you must file a Form IL-1120 ST, which is the small business corporation replacement tax return. You need to do this on or before the 15th day of the third month following the close of the tax year. If your S corporation belongs to a unitary business group, look to the Illinois Schedule UB to find out your filing requirements.
Pass-Through Withholding Payments
After December 31, 2008, a new law requires S corporations, trusts, and partnerships to make Illinois income tax payments on behalf of nonresident partners, beneficiaries, and shareholders. Often called the pass-through entity withholding, it means deductions don't come from payments the entities make to their owners. If the withholding payments are sufficient, no return is necessary.
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