INCORPORATION PRIMER

There are plenty of ways to form an organization for the ongoing conduct of business in Illinois (more than twenty at last count). One of the most popular and beneficial means of setting up a business is as a business corporation under the Illinois Business Corporations Act of 1983.

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 and the Illinois Business Corporations Act of 1983). A corporate entity never dies and, as long as state imposed fees are paid on an annual basis, can have a perpetual existence. The corporation is owned by its shareholders who invest money in the corporation in return for stock which evidences an ownership interest in the corporation. Operated properly, Illinois Corporations provide the benefit of limited liability to shareholders. 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. This is a significant benefit in a business venture where potential liability may be high.

In return for the benefit of shielding an owner's personal assets, the state places certain requirements on corporations. Most notably, the fees for establishing and maintaining a corporation.  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) Then, every year, the state requires thefiling of an annual report and the payment of an annual report fee and franchise tax.  The annual report usually $100 per year (again, with fees slightly higher for company's with capitalization in excess of $25,000).

In addition to cost factors, a corporation must conform to certain rules, regulations, and formalities. A meeting of the shareholders and board of directors must be held at least annually.  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 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 showing corporate actions, capital structure issues, and other information regarding the formalities of corporate operations, known as the "corporate record book". 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.

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.

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 determine the best entity and structure for your new business. To get this process started, please feel free to contact Richard Magnone at 773-399-1122.

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