An INCORPORATION Primer
There are over twenty different forms of entity that can be organized to conduct of business in Illinois. One of the oldest, popular and beneficial entities for setting up a commercial enterprise is a business corporation formed 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 granted 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.
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).
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.
A short note on 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.
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
Search corporate name availability with Secretary of State
Prepare and submit “Articles of Incorporation” to the state of Illinois
Record Articles of Incorporation with County Recorder
Provide corporate minute book, corporate seal, and stock certificates
Procure Federal Employer Identification Number from IRS
Prepare stock certificates
Prepare documents necessary to complete corporate minute book, including minutes of Board of Directors and Shareholders and Corporate By-laws
Prepare employee expense reimbursement agreements.
Special Internet Incorporation for Simple Entities (one or two shareholders with “basic” organizational needs and with capitalization under $20,000.00)
Flat $950 – includes all costs (corporate book, recording fees and state incorporation fees). For this fee, we will prepare, file and record the Articles of Incorporation, provide a corporate record book, prepare the initial corporate minutes pf the shareholders and directors, prepare by-laws, prepare employee expense reimbursement agreements, prepare stock certificates, obtain an FEIN, and other initial corporate record book items.
For “EXPEDITED” ONE DAY SERVICE please add $250
Please note, these fees do not include annual report fees payable to the Secretary of State of Illinois or registered agent fees for subsequent years. Registered agent services are provided on a yearly basis after the first year for $250 plus costs.
Also note, for entities with more than a few shareholders, additional steps, such as pre incorporation subscription agreements, SEC and State Securities filings, noncompete, nondisclosure and buy sell agreements may be necessary. These are additional services.
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. We are generally willing to have a short (5 to 15 minutes) initial discussion over the telephone to determine if we can assist in your situation and to determine if we might be an appropriate match to work with you. Face to face Initial consultations are by appointment only and a consultation fee is generally charged. To get this process started, please feel free to contact Richard Magnone via email or by phone at 773-399-1122.