Key Takeaways

  • To form an S corp in Illinois, you must first create a standard corporation or LLC, then elect S corporation status with the IRS using Form 2553.
  • Illinois S corporations have ownership restrictions: no more than 100 shareholders, all of whom must be U.S. citizens or residents, and only one class of stock.
  • Owners benefit from limited liability and pass-through taxation, avoiding double taxation while potentially saving on self-employment taxes.
  • Annual filing obligations include Form IL-1120-ST and compliance with state pass-through withholding for nonresident shareholders.
  • Naming, bylaws preparation, and registered agent appointment follow Illinois corporate formation rules, regardless of S corp status.
  • Businesses should carefully evaluate whether S corp tax treatment is optimal based on earnings, salary requirements, and potential for growth.

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:

  • Corporation.
  • Limited liability company (LLC).
  • Non-qualifying trust.
  • Nonresident alien.

Illinois S Corporation Eligibility Rules

In addition to the general shareholder restrictions, Illinois S corporations must meet IRS and state-level eligibility standards:

  • Number of shareholders: No more than 100 shareholders are permitted. Married couples can be counted as one shareholder for this limit.
  • Eligible shareholders: All shareholders must be U.S. citizens or permanent residents. Partnerships, other corporations, and most LLCs cannot hold shares.
  • Stock classes: Only one class of stock is allowed, meaning all shares must carry identical rights to distributions and liquidation proceeds.
  • Entity type: The business must first be a domestic corporation or LLC before electing S corp tax treatment.

If these conditions are ever violated, the S corp election will terminate, and the business will be taxed as a C corporation until a valid re-election is made.

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.

Business Liquidation

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.

When S Corp Status May Not Be the Best Fit

Although an S corporation offers tax advantages, it is not always the most beneficial choice:

  • Lower profits: If your business earns minimal net income, the additional administrative costs and payroll compliance for paying yourself a “reasonable salary” may outweigh the tax benefits.
  • Retained earnings needs: S corporations generally must distribute profits proportionally to ownership, making it harder to retain earnings for growth.
  • Complex ownership plans: If you plan to bring on investors who are corporations, foreign nationals, or want multiple stock classes, an S corp structure will not accommodate these arrangements.
  • State-level obligations: Illinois still imposes a replacement tax on S corporation income, currently at 1.5%, which may impact the expected savings.

Carefully assess your revenue, growth strategy, and ownership structure before making the election.

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.

Step-by-Step to Form an S Corp in Illinois

Forming an S corp in Illinois involves two main phases: creating the business entity under Illinois law, and electing S corporation tax treatment with the IRS:

  1. Choose your entity type and name – Select a unique name that complies with Illinois naming rules and includes a corporate identifier such as “Corp.” or “Inc.”
  2. File Articles of Incorporation or Articles of Organization – File with the Illinois Secretary of State, Business Services Department, and pay the applicable filing fee.
  3. Appoint a registered agent – Must be an Illinois resident or an authorized business with a physical Illinois address.
  4. Create bylaws or an operating agreement – Establish governance rules and shareholder/member responsibilities.
  5. Obtain an EIN – Apply through the IRS for your federal tax identification number.
  6. Hold your organizational meeting – Elect officers, adopt bylaws, and issue stock or membership units.
  7. Elect S corporation status – File IRS Form 2553 within 75 days of formation (or the start of the tax year you want S corp status) signed by all shareholders.
  8. Meet state tax and licensing requirements – Register for Illinois business taxes, secure any necessary permits, and file annual reports to remain in good standing.

Filing 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. 

Frequently Asked Questions

1. How much does it cost to form an S corp in Illinois?

Filing Articles of Incorporation costs $150, plus optional expedited fees. There’s no state fee for S corp election, but you must still file Form 2553 with the IRS.

2. Can an LLC in Illinois elect S corp status?

Yes. An Illinois LLC can elect S corp taxation by filing IRS Form 2553 after obtaining an EIN and meeting all S corp eligibility requirements.

3. What taxes do Illinois S corporations pay?

While S corps avoid federal corporate income tax, they must pay the Illinois replacement tax of 1.5% on net income and comply with pass-through withholding rules.

4. When is the deadline to file Form 2553 in Illinois?

File within 75 days of forming your entity or the start of the tax year you want S corp status to apply.

5. Do S corporations in Illinois file annual reports?

Yes. Illinois S corporations must file an annual report with the Secretary of State and pay the $75 annual fee to remain in good standing.

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