How to Start an LLC in Illinois
While Chicago is the epicenter of Illinois and one of the United States’ largest cities, the state is home to a much more diverse economy than The Windy City alone. With over one million small businesses that employ 2.5 million people, Illinois is a top choice for many entrepreneurs looking to create a new business. The most common structure chosen for a new business is a sole proprietorship, but for those who want personal asset protection and other benefits, an LLC is the top choice. Forming an LLC in Illinois is simple and accessible, and this step-by-step guide will help business owners register their LLC and stay in good standing with the state.
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Illinois requires you to file paperwork that registers your LLC with the state as the primary step to formalize your business. Before doing so, here’s a look at the process you’ll follow.
Name your LLC
Have a name in mind? Check on name availability through the state’s business directory.
Whether you already have the perfect name in mind or are struggling to nail one down, this first step is a critical one that can be trickier than it sounds. From a marketing perspective, it is important that your name is something memorable that conveys your value to customers immediately.
Picture your name on a sign or a business card and ask yourself what it sounds like to someone you’ve never spoken to before. With that, think about if it can be easily misspelled or confused for another name.
The internet adds another layer to this decision. Most people will find you by searching online, so you want to be sure that you can reserve the domain name and social media handles that match your business name.
It can be helpful to see what comes up on an internet search before you create an online presence, to see what you will be competing with in search results.
Name requirements in Illinois
If a name makes sense from a marketing perspective, the next step is to be sure it meets all the criteria for an LLC name in Illinois. This means that the name must be distinguishable from all other company names on record with the Illinois Secretary of State. You can run a name search on the state website to see if any businesses are already using the name.
Available names must also meet the following Illinois requirements:
- Must contain the term “Limited Liability Company”, “LLC”, or “L.L.C” in the name. Cannot contain “Corporation,” “Corp”, “Incorporated”, “Inc.”, “Ltd.”, “Co.”, or “LP”.
- Cannot use any words that indicate certain services that are not provided by the business, like banking, fiduciary, or insurance.
- Cannot imply that the business is a government entity.
- Cannot contain any word offensive to “good taste or decency”.
Reserving a business name
The way you formally choose your business name and prevent others from using it is by forming an LLC. If you are not ready to take that step but want to ensure the name remains available, Illinois allows business entities to reserve the name for three months. This is done by completing an Application to Reserve a Name and submitting it by mail to the Secretary of State, along with a $25 check to cover the processing fee.
You can file a name reservation in Illinois for 90 days.
Select a registered agent
The state of Illinois needs to guarantee that any legal documents, like service of process, are received by your business and responded to appropriately. The way they do this is by requiring each LLC to list a registered agent to serve as the designated point of contact. Agents are expected to be available during all normal business hours to receive documents and services of process.
Anyone can be named as the registered agent, including yourself, as long as they have a physical address in Illinois and are over 18 years of age. You can name anyone associated with the business or outside of it who will be available during the designated times.
To avoid anyone needing to be available year-round, you can also choose to use a registered agent service to act on your behalf. This service must be authorized to conduct business in Illinois and have a physical address (not a P.O. box) there.
File Articles of Organization
Articles of Organization formalize your LLC with the state of Illinois. This is done by completing and filing Form LLC – 5.5 with the Secretary of State Department of Business Services.
The Illinois Articles of Organization will require you to provide the following information:
- Name of your LLC
- The mailing address of your LLC’s principal place of business
- The effective date of your Articles of Organization (this is typically the date you file)
- Name and address of your registered agent
- Startup’s term of existence (this is typically “perpetual” unless you specify otherwise)
- Names and addresses for initial managers or members who have the authority of a manager
- Additional provisions like management structure
- Signatures of the organizers
Illinois requires all Articles of Organization to be submitted in duplicate and will only accept black ink or typeface.
You can fill out and submit your LLC formation documents here.
There is a $150 fee associated with an Illinois Articles of Organization filing. This payment is not refundable for any reason.
Illinois processing time
For both online and postal mail filings, the expected turnaround time is 10 business days. However, you can pay an additional fee for expedited processing if necessary.
Create an LLC operating agreement
Illinois will not require LLCs to file or present any kind of operating agreement upon formation. But despite the lack of requirements, it is best practice for all LLCs to have an operating agreement in place.
These legal documents are a way of outlining the ownership and operating procedures for the LLC, which can be referenced in the future as a way of settling disagreements and avoiding conflict.
For a complex business or situation, it can be wise to use a business attorney when drafting an operating agreement. But for most LLCs, online templates can be used to create a solid agreement.
Since there is no legal requirement for these documents to be filed in Illinois, it is mostly important that they cover all elements important to your business.
The basic components of an Illinois operating agreement should include:
- Organization: Official formation date of the LLC and who the members were, as well as how they have divided ownership. While equal ownership is a common structure, some LLC members will have varying measures of ownership.
- Management and voting: It should be determined if the LLC will be managed by its members or by appointed managers, as well as how members will vote on business matters. It is common for each member to have one vote, but this can also be divided in other ways.
- Capital: Specify the amount of money each member invested in the business at the start, and how more money will be raised in the future.
- Distributions: The way that profits and losses will be divided between members. Even distribution is typically used, but they can be divided in other ways.
- Changes: If a member leaves the company or a new one is added, how that will impact the management structure? This can include processes for buying out an existing member.
- Dissolution: What will happen if the business is officially dissolved, including who will take on what responsibilities and how assets will be managed?
Once your operating agreement has been created and signed, you can keep it as an internal record for future reference. The agreement may also be amended in the future.
Now that you are officially the owner of an Illinois LLC, your business is ready for the next steps. This includes a number of administrative tasks and activities to help you remain in good standing with the state.
Get your EIN
An unavoidable part of any business is federal taxes, including those paid to the federal government. In order to manage all the businesses that need to pay taxes each year, the Internal Revenue Service (IRS) issues unique identifiers called Employer Identification Numbers. These numbers, often known as EINs, operate like a Social Security Number, but for businesses instead of individuals.
For LLCs, there is no federal income tax filed on behalf of the company. However, any excise taxes and employer taxes will require a filing and therefore an EIN. A company with neither obligation may not be required to have an EIN, but it can still be helpful.
Without an EIN, you may need to provide your private Social Security Number on a variety of forms, including those seen by clients and vendors. This can be dangerous as it opens you up to a variety of problems, including identity theft. It is also likely that banks will require an EIN to open a business bank account. Since it is free to obtain one, having an EIN is the best practice for all businesses.
You can get your EIN by visiting the IRS website.
Get Illinois business licenses
The primary state-level permit in Illinois is the Certificate of Registration or License, which is sometimes known as a seller’s permit. This serves to register your business for state tax purposes and other business taxes – the taxes you will pay will influence whether you need a Certificate of Registration or a License. You can apply for this online through MyTax Illinois for no fee.
There is no generic business license required by the state of Illinois. Local governments throughout Illinois may require more licensing for businesses. You should always check with your city and county government offices in the location where you will do business to find out what is needed. In addition, you should check for any professional licensing requirements at the state level.
Open business bank accounts
Some LLC owners may be tempted to mix their personal and business finances for convenience, especially since they will be submitting only a personal tax return each year. However, doing so can actually put your personal assets at risk if your LLC is sued because it is considered a violation of the LLC structure. To protect your personal assets, you should set up separate bank accounts for your business.
Having dedicated business bank accounts can also be simpler in terms of accounting and tax reporting, as all income and expenses are tracked in one place. You can follow this up by getting a business credit card to further separate and track expenses, as well as build credit on behalf of the business.
Review LLC tax rules in Illinois
While LLC profits and losses are reflected on their members’ tax returns, Illinois has a specific tax related to these businesses. This is called a personal property replacement tax and is imposed on LLCs who elect not to be taxed as corporations. The rate is 1.5% of net income and is payable to the Illinois Department of Revenue each year.
The state also requires businesses to charge a 6.5% sales tax.
File an annual report
LLCs are all required to file an annual report in the state of Illinois. These must be done each year and can be submitted online through the Secretary of State for a $75 filing fee. Most of the information in this report is the same as the Articles of Organization, including any updates.
The annual report is due each year on the first day of the month during which your LLC was created. For example, if you formed your LLC on November 17th, your annual report will be due each year on November 1st. Filing more than 60 days after this date results in a $300 penalty and failing to file at all can cause your LLC to be dissolved by the state.
Some states refer to an annual report as a Statement of Information.
Get insurance for your LLC
In addition to the required insurance, most businesses will choose to have general liability coverage in place. An LLC as a business structure does offer personal liability protection, which safeguards personal assets like your home and car, but liability insurance can provide additional protection.
By state law, any business in Illinois with one or more employees, including corporate officers and LLC members, must have workers’ compensation insurance. This offers coverage in the case that an employee suffers an injury or illness as a result of their job.
This primarily protects a business against lawsuits related to normal business operations, such as a client being injured onsite or property damage caused by an employee. Certain professional services may also obtain professional liability insurance to guard against claims of malpractice.
Additional resources to help you set up a business in Illinois
As a part of its support for small businesses, Illinois offers a variety of resources for entrepreneurs looking to start an LLC.
- A step-by-step guide for doing business in Illinois.
- Each county clerk in Illinois, in order to find the right contact for local licensing information.
- The full guide to state taxes for employers in Illinois.
- All forms related to LLC formation and management in Illinois.
Can you dissolve an LLC in Illinois?
To dissolve an LLC, you first need to be sure that you adhere to anything written in your operating agreement related to dissolution. You can then file a Statement of Termination form, in duplicate, to the Illinois Secretary of State. This will formally dissolve your LLC.
How much is a seller’s permit in Illinois?
Illinois issues Certificates of Registration or Licenses to businesses in the state, which operate similarly to seller’s permits. There is no cost for a business to apply, and renewal happens automatically at no charge. It is therefore free to obtain and maintain a seller’s permit in Illinois.
Do LLCs in Illinois pay extra tax?
LLCs are pass-through entities, with all profits and losses being represented on the members’ personal taxes, avoiding the corporate tax rate. However, Illinois does charge an LLC tax of 1.5% of all net profits for any LLC that is being taxed in this way. This is known as a personal property replacement tax and is paid to Illinois.
The state recently eliminated the franchise tax too.
What is the cost to start an LLC in Illinois?
The primary cost for starting an LLC in Illinois is the $150 filing fee associated with submitting Articles of Organization to the state. There may be additional fees for an expedited processing time, as well as fees associated with other requirements. While obtaining a Certificate of Registration or License is free, many counties have fees to obtain other licenses.
Does Illinois require an operating agreement for LLCs?
There is no requirement for this type of business to have an operating agreement in place. However, it is best practice for all businesses to have one written, signed, and on file in your company records. Without an operating agreement, any conflict that cannot be solved will be referred to state LLC laws.
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