In this article, we explain how to form an S-Corp in Illinois. We answer the question “what is an S-Corporation?” and “should I work with an attorney to form an S-Corp?” We discuss restrictions on who can be a shareholder of an S-Corporation as well as the steps required to form an S-Corp in Illinois.
For some foundational information on whether an S-Corp is the right corporate form for your business, check out our article What is the Difference Between an S-Corp and an LLC in Illinois?
What is an S-Corporation?
An Illinois S Corporation is a standard corporation that is recognized by the law as an individual entity separate from its shareholders. Similar to C-Corporations, an S-Corporation shareholder will not be personally liable for corporate actions and debts. Unlike C-Corporations, an S-Corporation’s taxes pass through to its individual shareholders. While C-Corporation shareholders are taxed on corporate profits both on the corporate level and the personal level, S-Corp shareholders are only taxed on the personal level. This is advantageous to shareholders.
Restrictions on who can be a shareholder of an S-Corporation
S-Corporations have favorable tax treatment relative to C-Corporations; however there are some restrictions on S-Corp share ownership that do no apply to C-Corps. An S-Corp shareholder cannot be another corporation, an LLC, a non-qualifying trust, or a non-resident alien. S-Corporations are limited to 100 shareholders.
In addition, S Corporation can only have one class of stock. Therefore each share must get the same treatment in regard to the allocation of income, distributions, and losses.
The Steps Required to Form an S-Corp in Illinois
When a corporation is formed by filing Articles of Incorporation with the secretary of state, it is by default a C-Corporation. Once your corporation has been formed with the secretary of state, you can then elect to be taxed as an S-Corporation rather than a C-Corporation by filing an S-Corp election with the IRS.
To form an S-Corp in Illinois, follow these steps:
1.) Choose a name, appoint a registered agent and file your Articles of Incorporation: The first step to forming a corporation in Illinois is to file Articles of Incorporation with the Illinois Secretary of State. This can be done online at the Business Services page of the Secretary of State’s website. It can also be done by mail. Before filing, you should have a name selected. You can search your proposed name on the Secretary of State’s website to make sure it has not already been taken. You should also be prepared to list the principal business address as well as the address of your registered agent. Your registered agent is the person or entity appointed to receive legal notices on behalf of the corporation. Many corporations will list their attorney. Finally, be prepared to pay a filing fee.
2.) Obtain an EIN Number from the IRS: Once you have filed your Articles of Incorporation, you can obtain an EIN Number from the IRS. This is like a social security number for the business that is used to identify the business for tax purposes. An EIN number can be obtained online on the IRS website.
3.) File IRS Form 2553. To elect “S” Corporation status under the Internal Revenue Code, you’ll have to file IRS Form 2553. Instructions for how to complete the form are on the IRS website. Note that the completion of this form is time sensitive.
4.) Prepare your corporate bylaws: Bylaws are essentially a partnership agreement between the shareholders of a corporation. They set forth how the corporation will function, how directors and officers will be elected, how voting works, and how profits will be distributed. Single-shareholder S-Corps will want the bylaws to give the shareholder maximum flexibility and power to act. Multiple-shareholder S-Corps should work with an attorney (or an attorney for each shareholder) to carefully craft the bylaws in a way that protects the interests of all concerned.
5.) Issue Stock Certificates and Create Your Corporate Book: Your attorney can assist you in issuing stock certificates to all of the shareholders. The corporate officers should assemble a corporate book to keep track of the number of shares owned by each shareholder and store receipts for issued stock certificates, the Articles of Incorporation, bylaws, and meeting minutes discussed below.
6.) Hold your first shareholder meeting: At the initial meeting of the shareholders, the shareholders will ratify the bylaws, elect the directors of the corporation, and vote on any other necessary matters. Minutes of this meeting should be kept and filed in the corporate book. For single-shareholder corporations, the initial meeting of shareholders simply consists of the shareholder executing the meeting minutes to show that the meeting took place.
7) Hold the first meeting of the Board of Directors: At the first meeting of the board of directors, the directors will elect the officers of the corporation (the President, Vice President, Treasurer and Secretary) and vote on any necessary matters. For smaller S-Corps this meeting may occur at the same time and place as the initial meeting of shareholders. Again, for single-shareholder S-Corps this merely consists of executing a document prepared by the corporate attorney.
8) Continue to follow corporate formalities on an ongoing basis: In order to be effective as a liability shield and a beneficial tax vehicle, the incorporators of an S-Corp must not only properly execute all of the corporate formalities described above, but must also continue to maintain your Illinois s-corp by following corporate formalities such as annual meetings of shareholders and directors on an ongoing basis.
Should I work with an Attorney to Form an S-Corp?
While you are not legally required to form an S-Corp through an attorney, it is advisable for several reasons:
- If you do not correctly follow all of the proper corporate formalities while forming and continue to do business through your S-Corp may not protect its shareholders and directors from personal liability for corporate debts. An attorney will ensure that your S-Corp is set up correctly.
- Working with an attorney to incorporate is inexpensive, especially relative to the cost of your time attempting to draft the proper legal forms and understand the intricacies of the process.
- Your attorney can ensure that your corporation is set up in the most tax efficient and flexible manner for your needs. Incorporation is also a great chance to build a relationship with your attorney for your future business needs.
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