What is a corporation?
A corporation is a legal structure where the state sees the entity as separate from its owners. Therefore, a vital element of a corporation is its limited liability. The shareholders are not personally liable for the company’s debts. They have similar rights and responsibilities as an individual. This means that a corporation can enter into contracts, hire employees, own assets, file taxes, sue and be sued, and loan or borrow money. Either an individual or a group of people may form a corporation if they have a shared goal. Corporations are not always meant to obtain a profit.
Most large businesses are corporations. Some examples include Coca-Cola Company, Apple, Google, and Microsoft Corporation. Some corporations operate under their name, but there is also some that act under separate business names. An example is Alphabet Inc. which does its business under google.
The exact legal definition for corporations differs depending on their location, but a key feature of corporations is their limited liability, as previously stated. This means that corporation shareholders can participate in the profits through dividends and stock appreciation. However, they are not personally responsible for the corporation’s debts or liabilities.
What are the different types of corporations?
There are two main types of corporations: S and C. The primary difference between these two is how you pay tax on any income. S corporations don’t pay tax; the individual owners report the company earnings on their personal income tax returns. On the other hand, C corporations pay tax on their income, and so do any owners or employees of the corporation. Other differences between these two types of corporations include formation and ownership. See below for additional information.
- Formation: C corporations are the default corporation type. Filing the articles of incorporation to Illinois’ secretary of state without any additional forms automatically designates you as a C corporation. If you desire S corporation status, you need to file Form 2553.
- Ownership: C corporations don’t have many restrictions on who can be an owner or how many owners you can list. In comparison, S corporations are limited to 100 shareholders. These 100 shareholders must also be U.S. citizens.
- Taxation: As mentioned above, C corporations are taxed twice. The corporation itself pays an income tax as well as shareholders through dividends. S corporations receive pass-through taxation, and shareholders only report the business revenue on their personal income tax. The corporation does not file income taxes.
How do I form a corporation in Illinois?
There are several critical steps to forming a corporation in Illinois.
Step 1: Choose your Corporation’s name
The first step to forming a corporation is selecting a corporation name. The name needs to contain the words “corporation,” “incorporated,” “limited,” or “Company” or any of their abbreviations (Corp., Inc., Ltd., Co.).
For Illinois’ secretary of state to approve your name, it must be unique from any name of other business entities already listed in Illinois. You can search the Illinois Secretary of State business name database to check if your name's available. This search can be found here.
You can submit an Application for Reservation of Name form to the Secretary of State. The form may be found here. There is a $25 filing fee. If you want expedited service, you can submit an additional $50. For expedited service, you must request in-person to the Department’s Springfield or Chicago office. If you send this form through the mail, you will need to send it to the following address:Secretary of State
Department of Business Services
501 S. Second St., Rm. 350
Springfield, IL 62756
Step 2: Submit the Articles of Incorporation
The articles of incorporation are a key document when creating your corporation. Once you file the articles to the Illinois Secretary of State, your corporation is legally formed. You must include the following information when submitting this document:
- Corporate Name
- Corporate Address
- Agent Signature (will receive any service of process)
- The authorized number of shares the corporation can issue
- Each incorporator’s name and address
- Corporation duration
- Effective date
Illinois’ secretary of state allows you to fill out these articles online or via mail. The filing fee is $150 with an initial franchise tax payment rate of $1.50 per $1,000 of paid-in capital that is represented in Illinois.
Step 3: Select a registered agent
Illinois’ Secretary of state requires every corporation have a registered agent selected to receive any service of process in the state. Your agent may be either an individual or a professional service that is allowed to accept legal documents on behalf of the corporation. A requirement for the registered agent is that they must reside in Illinois. That is, they must have a physical address in Illinois. Before you designate someone as a registered agent, make sure they agree to the responsibilities, including accepting any service of process on your corporation’s behalf, before filing the articles of incorporation with Illinois’ secretary of state.
Step 4: Create corporate bylaws
The corporate bylaws are not filed with the state, and it is not legally required for you to have. Nevertheless, your corporation is strongly encouraged to create a set of bylaws. These bylaws set the basic rules for running your corporation. The advantage of having these corporate bylaws are twofold: 1) it provides your corporation with operating rules to decrease conflict, and 2) it gives credibility to your corporation for banks, creditors, the IRS, and others to view your company as legitimate.
Make sure you keep your bylaws, articles of incorporation, certificates, and minutes of shareholder and director meetings on file.
Step 5: Hold your first board meeting and appoint directors
The person who signed and submitted the articles of incorporation, also known as the incorporator, appoints the directors who will serve on the board until the first annual meeting for the shareholders. The next annual meeting is where shareholders will elect board members. The incorporator completes the Incorporator Statement that lists the initial directors’ names and addresses. This statement is not filed with the state but kept on file in the corporate records.
During the first board meeting, you will adopt bylaws, directors will appoint officers, select a bank, set the fiscal year, send out shares of stocks, and adopt an official certificate form and corporate seal.
It is essential to record the board meeting in corporate minutes.
Step 6: File your annual report
Illinois’ secretary of state requires any corporation performing business in the state to file annual reports and pay the associated $75 fee. The report must be filed by the corporation’s anniversary date (the date the articles of incorporation were submitted). You can file online. However, if your company has property or transacts business outside Illinois, you must file via mail.
Step 7: Request an EIN
You must also obtain a federal employer identification number (EIN). The IRS issues this number to the corporation, and you can obtain one by completing the online application. There are no fees to obtain an EIN.