C-Corporations. A corporation is formed by filing articles of incorporation with the Illinois Secretary of State. The articles of incorporation contain both mandatory and optional provisions, as outlined by the Business Corporation Act of 1983, which governs the formation and operation of corporations in Illinois.
The articles of incorporation state how the affairs of the corporation are managed and regulated (these can also be placed in the corporation by-laws), and outline the issuance of shares to shareholders. Shareholders are the equity owners of the corporation. The shareholders choose the manager(s) of the corporation, who are called the directors and sit on the board of directors. In a close corporation,1 the shareholders may elect to manage the corporation instead of choosing directors.
The corporate form may be a good choice for a direct farm business because the state considers a corporation a separate legal entity from its owners, thus limiting the personal liability of the owners for the corporation's liabilities and debts. There are downsides, however, to incorporation. Incorporation is time-consuming and expensive due to the paperwork and filings required by the statute. Further, there are many statutory and administrative formalities that must be observed in operating the corporation. Observing these formalities is critical to maintaining the liability shield for the individual owner.
Incorporation also has negative tax implications (see the federal and state income tax pages for more information sources on corporate taxation). A regular corporation is commonly known as a Subchapter C-Corporation. The "C" designation relates to the IRS tax status of the corporation. A C-Corporation's profits are taxed AND the owners/shareholders of the corporation pay individual income tax on the money they receive as salary, bonus, and dividends. This is what is known as "double-taxation." To avoid this double-taxation problem, a corporation may elect Subchapter-S status with the IRS, if certain requirements are met (see information on S-Corporations below).
The Illinois Secretary of State has published a 24-page Guide For Organizing Domestic Corporations. This guide provides helpful information on: forming and filing the articles of incorporation; choosing the corporate name, registered agent, and corporate purpose; establishment of a board of directors; organizing the corporation; opting for close corporation form; and, the forms and fees applicable to corporations in Illinois.
S-Corporations. An S-Corporation designation refers to a corporation that has elected S-Corporation status with the IRS for federal income taxation purposes. The reason a company elects S-Corporation status is to avoid the double taxation the C-Corporations encounter. Under the Internal Revenue Service Code, corporations are considered either "Subchapter C-Corporations" or "Subchapter S-Corporations" (subchapters C and S refer to the section of IRS code governing these corporations). The IRS considers all corporations C-Corporations unless S-Corporation status is elected.
The corporation elects S-Corporation status with the IRS by filing Form 2553. The instructions to Form 2553 provides a test as to who may elect S-Corporation status. There are many restrictions to electing S-Corporation status. S-Corporation status must be specifically elected and consented to by all shareholders. It can have no more than 100 shareholders. All shareholders must be U.S. citizens or resident aliens. The S-Corporation must be a U.S. company. An S-Corporation may only have one class of stock, and have limitations on the type of income they receive. Only individuals, estates, certain exempt organizations, and certain trusts can be shareholders. Each shareholder must consent to S-Corporation status.
Only once the IRS accepts the election on Form 2553 can the corporation file its taxes as an S-Corporation. For more information sources on S-Corporation taxation, see the federal and state income tax pages.
Limited Liability Company (LLC). LLCs are created through state law. The Limited Liability Company Act governs the establishment and operation of LLCs in Illinois.
An LLC enjoys the benefits of both the LP and a corporation. Its members enjoy limited liability against claims and debts of the LLC. The members of an LLC have more management flexibility, electing to manage the corporation themselves or by designating a managers through the articles or organization. An LLC can enjoy the favorable pass-through tax treatment of an LP (thus avoiding corporate double-taxation).
The Illinois Secretary of State has published a 16-page Guide for Organizing Domestic Limited Liability Companies, which provides helpful information on the articles of organization, filing the articles of organization, organizing the LLC, other required filings, and forms and fees.
1 A close corporation is typically owned and operated by a few individuals, perhaps family members, instead of public shareholders. Illinois law allows close corporations to function more informally.
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