INCORPORATION PRIMER

There are over twenty different forms of entity that can be organized to conduct of business in Illinois. One of the most popular and beneficial entities for setting up a commercial enterprise is a business corporation formed under the Illinois Business Corporations Act of 1983.

THE ENTITY

A corporation is a legal "entity" brought into existence by the grace of the state (in Illinois, these charters are conveyed by the Secretary of State pursuant to the Illinois Business Corporations Act of 1983). As long as the state imposed fees are paid annually, a corporate entity never dies and can have a perpetual existence. The corporation is owned by its shareholders who invest money in the corporation in return for shares of stock which evidence an ownership interest in the entity. Operated properly, Illinois Corporations provide their shareholders with the benefit of limited liability. Assuming that a corporation meets the minimum capitalization guidelines and corporate formalities are observed, Corporations limit a shareholder's liability exposure to the amount of the owner's equity investment in the corporation. The limitation of liability exposure is a significant benefit in a business venture where potential liability may be high.

STATE FEES

In return for the benefit of shielding an owner's personal assets, the state places certain requirements on corporations. First, the State imposes fees to establish and maintain a corporation.  At the time of incorporation, the state charges an initial fee to obtain a corporate charter and a "franchise fee" that varies depending upon the size and capital structure of the corporation. State fees for most incorporations cost only $175. (Fees are slightly higher for corporations capitalized with over $20,000 - these fees were increased by Secretary of State Jesse White from $100 as of December 1, 2003) Every year thereafter, in order to continue operations, the corporation must file an annual report and pay the state an annual report fee and franchise tax. The annual report costs most small corporations $100 per year (again, with fees slightly higher for company's with capitalization in excess of $25,000).

FORMALITIES

In addition to cost factors, a corporation must abide by certain rules, regulations, and formalities. The shareholders and board of directors must meet at least annually, even if only on paper.  Such meetings should be held more often to conduct any irregular business of the company.  Every time the corporation shareholders or board of directors act, those actions should be documented by the corporate secretary with meeting minutes.  At those meetings, directors and officers are elected and other significant business policies and decisions are voted on and approved. The corporation must maintain a record, known as the "corporate record book", detailing corporate actions, capital structure issues, and other information regarding the formalities of corporate operations. Without following the proper formalities, a creditor may be able to "pierce the corporate veil" and reach the personal assets of the corporation's shareholders.

TAXATION

One of the main disadvantages of the corporate form is in the area of taxation. Because Corporations (sometimes referred to a "C Corporations") are considered independent entities, they are taxed separate and apart from the corporate shareholders. Corporations file a corporate income tax return with the IRS and are taxed at the corporate tax rate. Then, any dividend distributions made to shareholders are taxed to the shareholder as dividend income on the shareholder's personal income tax return. Thus, corporations and their owners are said to face "double taxation".  Tax planning may be employed to avoid the double taxation result in some cases.  In some instances, the IRS code provisions may allow a corporation to declare "S Corporation" status, an election to be treated under a different set of tax rules for small business corporation that automatically passes the income and losses of the company through the corporation directly to the shareholders in the same manner as a partnership, to avoid the double taxation problem.

ENTITY SELECTION

In all, the corporate form is a trusted vehicle for conducting business. Although limited liability companies are fast becoming the rage in Illinois, they remain somewhat untested in the courts (after all, we have about 400 years worth of corporation law to look back upon) and can be "too much of a good thing" as they sometimes require complex shareholder agreements, higher attorneys fees and higher state fees. Anyone considering a limited liability entity should certainly consider both the corporation and limited liability company as each has its own set of strengths and weaknesses.  However, in many cases, a corporation is the best vehicle of choice for your business.

SERVICES AND FEES

HOW TO GET STARTED

The first step to incorporation is to contact us. We can discuss the various issues involved in the incorporation process and help you determine the best entity and structure for your new business. To get this process started, please feel free to contact Richard Magnone or one of our other attorneys at 773-399-1122 or via email by clicking here.

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