Why Consider an LLC as the Way to Run Your Business?
Here is some of the key information that you should know when considering a limited liability company (LLC) as the structure for your business. It is recommended that you consult with an accountant about tax issues related to LLCs and other business possibilities (such as corporations).
1. Clients seek protection from lawsuits
For most persons who establish an LLC, their primary objective is to limit their liability (hence: limited liability company). Like a corporation, the owners of an LLC can limit their liability to the company’s assets if the company is properly established and registered with the state, the company continues “in goodstanding” status (by filing an annual report and paying an annual fee to the Illinois Secretary of State), and the members of the company properly operate the business (for example, the company funds aren’t used for personal expenses).
2. Clients like the less formal structure (compared to a corporation)
Unlike a corporation,….
(a) An LLC doesn’t need to have a board of directors
(b) An LLC doesn’t need to have annual meetings
Note: It does cost more to set up an LLC (compared to a corporation), and the fee to file the annual report is $250 for an LLC (and often only $100 for a small corporation in Illinois). However, many people do consider the benefits of an LLC as justification to set one up (and pay the additional costs to the state).
3. How is a limited liability company managed?
A limited liability company can be managed in one of two ways:
(a) the LLC can have one or more “managers” who will have authority to run the company and make the major decisions (such as the hiring of employees) and sign important documents (such as contracts, deeds, etc.)
(b) the LLC can vest management authority in the members (without designating anyone as a manager)
Note: Although an LLC need not have any officers, in multi-member LLCs, it’s often a good idea to appoint someone as the treasurer, and possibly someone also as the secretary.
Note: In a corporation, a board of directors is the key group of persons to oversee and run a corporation. As to the day-to-day decisions, a corporation has a “president” to normally act on its behalf, such as signing contracts, signing deeds to real estate, etc. (and sometimes one or more vice presidents to assist the president and cover some of the workload).
What are the fees and expenses to establish an LLC?
Normally, there are the following fees and expenses:
(a) a one-time $500 fee to the Illinois Secretary of State
(b) the cost of purchasing an LLC binder with membership certificates (normally less than $100)
(c) attorney’s fees (if a lawyer is hired to help in establishing the LLC and preparing the company’s initial paperwork: such as the operating agreement which lays out the key information about running the company)
(d) additional fees to the Illinois Secretary of State (if the client desires “expedited service” which allows the company to be quickly registered within one or two business days)
What are the steps in establishing a limited liability company?
Here are the normal steps in creating an LLC:
(a) choosing a name for the company
You can check with Illinois Secretary of State’s website to find out if a name is available for your use. The name must be distinguishable from other companies registered with the Illinois Secretary of State’s office.
A limited liability company must have one of the following in its name:
Limited Liability Company
(b) A 2-page form entitled “Articles of
Organization” (Form LLC-5.5) must be filed out,
signed in black ink, and then 2 copies of it are sent to
the Illinois Secretary of State’s office. (If you are
using “expedited service”, and your attorney has an
account established with the Illinois Secretary of
State’s office, then the form can be faxed in, and the
attorney’s credit card charged for the fees.)
There are certain documents that must be kept at the registered office (for any member, or a legal representative of a deceased member, or the legal representative of any member under legal disability) to see during normal business hours):
* a list of the names and addresses of each member
* a copy of the Articles of Organization
* copies of the last 3 years of all income tax returns
* a copy of the operating agreement and other company financial documents for the last 3 years
(c) after the Illinois Secretary of State’s office registers the company, then other paperwork is completed for the company’s files (such as the company’s “Operating Agreement” which states a number of things, such as how the company will be run, what powers or limitations will apply to any managers, how profits will be divided among the members, what happens if a member desires to sell his/her interest in the company, etc.) and membership units are issued to the owners of the company
Note: A corporation’s owners are called “shareholders”, whereas the owners of an LLC are referred to as “members”. Shareholders own “stocks”, and members of an LLC own “units” or “membership units”.
(d) a federal tax number (FEIN) is acquired from the IRS (often by filing form SS-4 through the IRS’s website)
(e) a bank account is established for the company (and you must have the FEIN before you can set up the bank account for the LLC)
Who can be a member (owner of an LLC)?
Can an LLC be established in Illinois with just one member?
Yes. Illinois allows single-member LLCs. The IRS also recognizes single-member LLCs. Not all states may recognize and allow single-member LLCs.
What is a series LLC?
Illinois, and some other states, allow “series” LLCs. A series LLC can create within itself separate “series” (or cells / divisions) that have their own purposes, interests, liabilities, and even separate members. To establish a series LLC in Illinois, Form LLC-5.5/SO is completed (rather than the standard Form LLC-5.5), and the $750 filing fee is paid to the Illinois Secretary of State.
After the Articles of Organization are filed with the State, then the LLC may create one or more individual series by filing Form LLC-34.40 (and paying the applicable fees).
Example: AB LLC is formed (with the purpose to purchase and rent out real estate) as a series LLC, and Alan and Brad are the two members. Then two series are formed: AB Grand LLC, and AB Superb LLC. Each of the series owns an apartment building. Each series has its own members (which happen to be Alan and Brad in both cases). However, whereas Alan and Brad are equal owners of the membership units of AB Grand LLC, Alan owns 70% of the membership units of AB Superb LLC (and Brad owns the other 30% of the membership units of that company). Each of the series has its own FEIN (federal tax number) and its own bank accounts. Management of the two series could be the same, or it could be different (for example, AB Grand LLC could be managed by the members, and Alan could be the sole managing member of AB Superb LLC). The plan is that if one of the series ever loses a lawsuit, such lawsuit should not affect any of the other series.
What do I need to know about the annual report and the annual fee due the Illinois Secretary of State?
The annual report is due before the first day of the company’s anniversary month. In other words, if XYZ LLC is registered with the Illinois Secretary of State in July 2007, then the annual reports will be due on or before July 1st of each year. If the annual report isn’t filed (and the annual fee paid) within 60 days of its due date, then company will be in “penalty status” (rather than “goodstanding”), and there will be a late fee of $300 due the Illinois Secretary of State (in addition to the normal annual report fee, which is presently $250).
If the annual report isn’t filed (along with the annual fee, and the late fee) within 180 days of the due date, then the Illinois Secretary of State will consider the company as “dissolved” (and such status will be shown on the Illinois Secretary of State’s website).
Does Illinois have any specific laws regarding limited liability companies?
Yes. See 805 ILCS 180 (Limited Liability Company Act) – effective January 1, 1994.
How are limited liability companies taxed?
There are several possible ways that an LLC can be taxed.
Are LLCs recognized in all states?
All states recognize limited liability companies. The first state to allow LLCs was Wyoming, in 1977. Hawaii was the last state to acknowledge LLCs as a proper business structure. Illinois has allowed limited liability companies since 1994.
What is the purpose of filing an annual report with the state?
On the annual report you can state…
(a) if the LLC’s principal place of business has changed
(b) who the managers are (if you have changed so that you are now using managers, or if the managers have changed), or who the members are (if the company isn’t being managed by members)
Note: If you desire to change the registered agent, or change the registered office, then you must file Form LLC-1.36/1.37 with the Illinois Secretary of State (and pay the applicable fee).
What happens if an LLC misses filing the annual report on time?
First, there can be a late fee of $300 to file late (so it is very important to file on time and save your hard-earned money).
Second, someone else could take your company’s name (and set up their business with your “old” name).
Third, you can loss the protection of the company (as your business is no a “limited liability company” in “goodstanding” with the state). After a period of time, the state will list your company as “dissolved”.
Note: The annual report, which is only 1-page, can be mailed to the Illinois Secretary of State (with the check for $250 – unless you are late and have to include the $300 late fee). Additionally, normally the annual report may also be filed electronically with the Illinois Secretary of State (through its website), and then a credit card can be used for the fees.
If you have questions about the annual report, you can call the Illinois Secretary of State at 217-524-8008 (from 8 a.m. to 4:30 p.m.).
How can I find out if my company is still in goodstanding with the state?
You can call the Illinois Secretary of State (217-524-8008), or you can go to its website and find out (see “Corporate/LLC Search / Certificate of Goodstanding”).
The main website is: www.cyberdriveillinois.com
To get quicker to the business part of the website, type the following: www.cyberdriveillinois.com/departments/business_services/home.html
What does it mean when a company “does business under an assumed name”?
A company can choose to do business under a name different than its company name. For example, “Jones LLC” might want to conduct its business as “Best Carpenter Services LLC”. In order to do so properly in Illinois, a check must be done to make sure no one has registered the name “Best Carpenter Services” with the Illinois Secretary of State as either or corporation or an LLC. Then, for an LLC to do business under an assumed name in Illinois, Form LLC-1.20 is filled out, signed in black ink, and 2 copies are sent to the Illinois Secretary of State (along with the applicable fee). You must renew the assumed name every few years, and file Form LLC-1.20 (and pay the applicable fee).
What else should I know about the Illinois Secretary of State?
The Illinois Secretary of State’s website has the following…
(a) limited liability company forms that are filed with the Illinois Secretary of State
They don’t provide “operating agreements” or other documents that you might need (such as a resolution stating who are the managing members, who are the members, the number of units owned by the members, etc.)
(b) an annual report form
(c) “A Guide for Organizing Domestic Limited Liability Companies”
What other things must a company normally do when it is first established?
(1) The company should obtain an Unemployment Compensation Number from the Illinois Department of Labor.
(2) The company should register
(3) Your village/city might require that you get a business permit/license to do business in that municipality (and there may be a yearly fee due).
(4) You may need a Retailer’s Occupation Tax Number from the Illinois Department of Labor (if you are going to sell goods as part of your business).