Starting an S Corporation in Illinois

When starting a new company or revamping an existing organization, you want to ensure your existing small business entity receives IRS tax advantages. One of your options is to set up an S corporation. 

You might have heard that establishing an S corp is easy, but there’s more to it than a simple declaration. Let’s see what it takes to launch an S corporation in Illinois.

S Corporations in Illinois: Key Points

• An S corporation is a tax classification you can apply for with the IRS as a corporation or LLC.

• S corp status offers pass-through taxation, liability protection, and easy management.

• You must form an LLC or C corporation before electing to be an S corporation with the IRS.

What Is an S Corporation?

An S corporation isn’t a business entity or structure. Instead, it’s a tax classification you can apply for as a corporation or LLC with the IRS. Once you attain your S corp status, you pass income, deductions, credits, and losses through to your shareholders for tax purposes.[1]

Keep in mind that the IRS doesn’t tax S corporations at the entity level; your shareholders are taxed individually. A limited liability company (LLC) or a C corporation is different in this respect:

• LLC: No taxation at the entity level with the right structure; profits and losses are passed through to members directly.

• C Corp: Owners’ salaries and fringe benefits can be deducted as a business expense, so these shareholders are often subject to double taxation.

Tax Considerations for an S Corporation in Illinois

Since an S corp is a tax classification and not a business structure, you should pay special attention to the tax considerations of this status.

Illinois Tax Treatment of S Corporations

Illinois requires S corp owners to pay two forms of tax:

• Personal Income Tax: Your income tax rate in Illinois is 4.95% on adjusted gross income. It includes any profit distribution from your LLC and salary minus deductions.

• Personal Property Replacement Tax: This type of tax is paid on your business income. For Illinois S corporations, the rate stands at 1.5%.

Estimated payments are rarely required.[2]

Don’t forget that you earn a salary as an S corporation owner directly out of your company. This amount is also subject to self-employment tax and federal income tax. You might also need to pay profit distributions.

Illinois Franchise Tax for S Corporations

Illinois S corp owners pay $800 in franchise tax per year. The amount is due in the first quarter of every accounting period. It must be paid, whether your business is active or inactive. You must also pay it if you file a tax return for short periods (under 12 months) or aren’t making a profit.

The good news is that the state waives the minimum franchise tax on eligible or newly formed S corporations if you file an initial return for your first taxable year. Here are two more scenarios that may allow you to avoid your franchise tax in your first year of business:

• Your taxable year isn’t longer than 15 days

• You didn’t perform any business operations in Illinois during your tax year

Pass-Through Taxation

When you launch an S corp or transition your C corporation to this status, the federal government taxes your profits only at the individual level. It rarely taxes your business. 

This form of taxation is also known as pass-through taxation. It’s similar to general partnerships, sole proprietorships, and LLCs that aren’t taxed as standard corporations.

Requirements for Forming an S Corporation in Illinois

Although the S corp status is popular, not every business can qualify. You should be aware of the specific IRS limitations before you file. 

To be eligible for an S corporation, you must meet the following requirements:

• Can’t have two or more classes of stock[3]

• Must be a domestic LLC or corporation

• Must have fewer than 100 members if you’re an LLC or shareholders if you’re a corporation

• Must not be an international sales corporation or specific insurance company or financial institution because these are usually ineligible

• Must not have nonresident aliens, corporations, or partnerships as shareholders

• May have U.S. citizens, estates, or trusts as shareholders

The last thing you need is to start the filing process without verifying you meet all these conditions. Swyft Filings is here to help. Our comprehensive online filing service ensures you’re fully eligible for an S corp status.

Filing as an S Corp in Illinois

Now that you understand the tax intricacies of an S corp in Illinois, let’s see what the filing process involves.

Step 1: Choose a Business Name

You first need to select the name of your company. Your marketing strategy plays a key role here, as you need a name that encapsulates your offerings and is memorable.

However, the legal standpoint is also essential. Your name should have the following characteristics:

• Must be different from other business names registered with the Secretary of State.

• Must include a proper designator in the business name (i.e., limited liability company, LLC, or L.L.C.) 

• May not include the use of Co. and Ltd. [4]

• May not contain elements that may make others confuse your business structure with another

• May not include any words or phrases that indicate you’re running an insurance or banking agency or have a government organization

• May not include slurs and other offensive words and phrases

If you have a name in mind, a great way to check other companies’ names is to use our free business name search. It reveals whether your name is the same as other companies in the state so you can use it safely.

After confirming the desired name of your S corporation in Illinois is available, you can perform a business name reservation. It keeps others from using your name until you complete your formation process.

Step 2: Appoint Directors and a Registered Agent

The next step is to appoint the directors of your company. This role is critical, as it ensures the interests of clients, employees, investors, and other S corporation shareholders are met. Furthermore, it maximizes the efficiency of the company. They can also elect various officers of your organization, including secretaries and treasurers.

Having a registered agent is just as crucial as having S corp directors. An Illinois registered agent is a business entity or individual who receives legal documents on your behalf. The person or organization fulfilling this role must be an Illinois resident or have permission to do business in your state. Additionally, they must have a physical street address (P.O. boxes aren’t allowed).

Here are the primary responsibilities of your registered agent:

• Accepting legal notices, documents, and government mail for your pass-through entity

• Acting as the point of contact for the state government to accept service of process

You can be your own agent in Illinois, but this is ill-advised. The most considerable risk is that clerks may deliver service of process in front of your investors, customers, or employees. It can diminish your reputation if they find out you’re being sued.

On top of that, you’d need to be present at your office during standard business hours as a self-designated agent. As a result, you’d rarely, if ever, take time off.

The easiest way to avoid these issues is to hire a registered agent service like Swyft Filings. Here’s what makes us a great solution:

• Receive service of process and other documents on time

• Keep sensitive information private

• Remain compliant with registered agent requirements, allowing you to avoid penalties and other consequences of not having an agent

• Avoid changing the address of your agent when relocating your business

Step 3: File Articles of Organization

After securing your business name, hiring directors, and appointing a registered agent, you now need to file articles of organization or articles of incorporation.[5] Once approved, the document officially registers your organization in Illinois.

Because an S corp is a class status, you need to register your business as an LLC or corporation. The online filing fee for an LLC is $150, and you can submit your Certificate of Formation online or via mail.

If you choose to file via mail, download this form and send it to the following address with payment for the $75 fee:

Department of Business Services

Limited Liability Division

501 S. Second St., Rm. 351

Springfield, IL 62746

There are several crucial considerations to remember when forming an LLC, but staying compliant should be your main priority. In particular, your franchise tax is due at the same time as your annual report. Failure to submit your report and pay your taxes can be a major issue, so turn to Swyft Filings to stay on top of your duties.

Step 4: Create an S Corp Operating Agreement

Creating your S corp operating agreements is paramount. This critical document isn’t always mandatory, but you should form one nonetheless. It normally lays down the rules you must follow, lists your shareholders and their ownership percentage, and many other essential details.

Furthermore, your operating agreement can discuss how you handle your finances and decision-making, including your voting structure and management. Once all members sign it, the document becomes legally binding.

Bylaws are a vital part of your operating agreement. They help clarify several essential details:

• How will your corporation function?

• How will you elect officers and directors?

• How does your voting work?

• How do you distribute profits?

If you’re a single-shareholder company, your bylaws should provide higher flexibility and decision-making. By contrast, each shareholder in a multiple-shareholder S corp should have an attorney to negotiate the best terms for the party they represent.

Here are the steps most business owners take when forming their S corporation operating agreements:

• Setting ownership percentages

• Designating compensation details, rights, and responsibilities

• Adding terms of adding new shareholders or leaving the S corp

• Determining dissolution terms

• Inserting a severability clause, which protects some terms if they’re not harmonized with a federal or Illinois state law.

Step 5: Apply for an Employer Identification Number

The Secretary of State also requires you to obtain your Employer Identification Number (EIN). The IRS issues this number, which serves as your Social Security number. The state uses it to identify your company for various employment and income taxes.

Step 6: File Form 2553 for S Corporation Election

The final step might also be the most critical step when setting up your organization. You must complete IRS Form 2553 to apply for your S corp status.[6] The state requires you to submit the form:

• Within 75 days of your business entity formation or no later than 75 days after the start of the tax year, during which the S corporation election will take effect

• At any point during your tax year that precedes the tax year of the election

You can also file the form after the 75-day deadline. However, the state also requires you to submit Form 8832 in that case (Entity Classification Election). You’ll need to file the forms together via certified mail to register your company as an S corporation.

Keep in mind that all shareholders need to sign the forms in the consent section.

Illinois S Corp vs. Illinois LLC

The biggest reason you want to earn your S corp status is to enjoy different tax treatment. But before you start the filing process, you should also understand the differences between an S corporation and limited liability company. 

In particular, what are the advantages and disadvantages of forming each?

Advantages of Starting an LLC in Illinois

• Limited liability for members and managers

• Flexible management and good asset protection

• Flow-through taxation to eliminate double taxation

• High privacy

• Flexible profit and loss allocation to members

Disadvantages of Starting an LLC in Illinois

• Might be subject to extra fees

• Will be subject to self-employment or payroll taxation on all income

• Might not be allowed to start an LLC as a dentist, doctor, and other professional group

• Must consent to all membership transfers, which can make the process time-consuming

Advantages of Forming an S Corporation in Illinois

• Lower self-employment taxes than those of LLCs

• Exceptional asset protection

• Easy management, as an S corporation can exist forever and doesn’t terminate after the owner’s and shareholders’ death

• Smooth ownership transfer

• Additional credibility to customers and partners

Disadvantages of Forming an S Corporation in Illinois

• Face more corporate formalities due to various tax purposes

• Limit the number of your stock classes to one

• Subject to higher IRS scrutiny to ensure all shareholders receive reasonable compensation

Ready to File for an S Corp Status in Illinois?

As so many steps are involved in obtaining your S corp status, you might want someone to help you make the transition faster. That someone is Swyft Filings. We help small business owners acquire this tax classification with a robust business formation service.

With us by your side, S corp limitations will no longer be as daunting. We’ll handle all the paperwork so you can form your S corporation in Illinois effortlessly.

Frequently Asked Questions

What is an S corporation in Illinois?

An Illinois S corporation is a tax classification in which profits and losses are passed through to individual shareholders.

Does Illinois recognize S corporations?

Yes. The state of Illinois recognizes S corporations as a tax status.

What is the turnaround time for filing for S corp status with the IRS?

Most business owners receive approval for their S corp within a month or two.

What is the difference between an S corp and an LLC?

An S corp allows for easier ownership transfer and perpetual existence. The same can’t be said for LLCs.

What are the requirements for an S corporation in Illinois?

Your Illinois S corporation must have up to 100 shareholders (resident taxpayers), one class of stock, and it can’t be an international financial institution.

Are taxes for LLCs and S corps the same?

No. LLCs typically pay higher taxes.

What is the S corp tax rate?

Your S corp tax rate is determined according to your income.

How do I dissolve an S corporation in Illinois?

You dissolve your S corporation by submitting Articles of Dissolution to the Secretary of State.

Bibliography

1. Illinois Department of Revenue. “Tax Subtractions and Credits (for Partnerships and S Corporations).” Accessed March 7, 2023.

2. Illinois Department of Revenue. “Are S Corporations Required to Make Estimated Payments?” Accessed March 7, 2023.

3. Illinois Secretary of State. “Corporation Articles of Incorporation.” Accessed March 7, 2023.

4. Illinois Secretary of State. “Proposed Name of New Corporation.” Accessed March 7, 2023.

5. Illinois Secretary of State. “Articles of Organization.” Accessed March 7, 2023.

6. Internal Revenue Service. “About Form 2553, Election by a Small Business Corporation.” Accessed March 7, 2023.