Illinois Incorporation, LLCs & Corporate Law

In this article, we answer the question, “what rights do LLC members have in Illinois?”  We explain Illinois LLC members’ financial rights, Illinois LLC members’ voting rights, Illinois LLC members’ rights to inspection of records, dissenters rights in Illinois LLCs, and derivative action rights of LLC members.  

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The purpose of this article is to explain the rights and remedies under Illinois law afforded to minority shareholders of Illinois corporations and LLCs.  Let’s start by defining the terms “minority shareholder” and “closely held corporation.” ​

What is a Minority Interest in a Corporation or LLC Under Illinois Law?

​A minority interest in a Corporation or LLC is a shareholder of a corporation or a member of LLC who does not control the operations of the business.  In practice, a minority shareholder is generally anyone who owns less than 50% of the shares of the company, and therefore does not have voting power over the company’s decisions.

Incorporating a business is important for two primary reasons: (1) to protect personal assets from business creditors; and (2) to obtain favorable tax treatment for all business income. The purpose of this article is to educate small business owners regarding the two types of corporate entities that are particularly preferable for small businesses: the Limited Liability Company (LLC) and the S-Corporation. In deciding between incorporating as an LLC or as an S-Corporation, there are a number of considerations to take into account:

‍A. Similarities between an S-Corps and LLCs: favorable tax treatment and limited liability

‍Both S-Corps and LLCs prevent double-taxation (taxation at both the corporate and individual level) and limit the personal liability of shareholders.

1. Prevention of double-taxation

One benefit that LLCs and S-Corporations have over other corporate forms is that they allow all income to pass through the business and flow directly to the business’ principals. This is important because all losses and or earnings are reported on the principals’ tax returns, rather than on the business’ income report. This eliminates the corporate tax, otherwise as the “double tax” of standard corporations.

In the case of standard corporation (or a C-corporation), the net income of the corporation is subject to the corporate tax. The crucial distinction between a C-corporation and an LLC or an S-Corporation is the tax implication on the remaining income after the corporate tax. In the case of a C-corporation, after the corporation has been taxed, all remaining money is taxed a second time when it is distributed as dividends to the shareholders of the corporation. This is not the case for an LLC or an S-Corporation.