How to Form an LLC in Illinois: The Affordable Way

Are you someone looking to set up an LLC in Illinois? Great! The State has a very business-friendly environment with affordable goods and services and a comparatively low tax rate for small businesses.

If you’re wondering how to open an LLC in Illinois, you’re at the right place! We are here to help you out with the entire process. Consider this article your friendly guide to forming your company in the State, taking you one step closer to the LLC of your dreams.

Naming your Illinois LLC

Naming your LLC right is the beginning and one of the most critical steps in forming your LLC. The name you choose appears everywhere, including essential documents such as annual reports, advertisements, etc. 

You must select a name that is appropriate for your business. A good name will help your LLC to have brand value in the market. Make sure that you have a unique and creative name.

While naming your LLC, you must follow all the naming guidelines the State of Illinois has laid down.

Naming Guidelines

The name of your business should have the words “limited liability company” or one of its abbreviations (LLC or L.L.C.).

The name of the LLC should be unique and must not resemble the name of any existing entity that has been permitted to conduct business in the State of Illinois. 

The name you select for your LLC should not give the impression that your entity is a government agency. Therefore, you cannot use terms like “F.B.I.” or “Treasury.”

Your LLC’s name must not include any professional designation, such as Doctor, Attorneys, etc., without prior license taken from the concerned authority. It is also required that a professional be part of your LLC before such designation is used as a part of your LLC’s name. Similarly, usage of certain words, like “Bank” or “University,” is restricted and involves obtaining the written consent of concerned authorities and additional paperwork and compliance requirements.

Does Your Business Require a DBA?

A DBA (doing business as) enables you to operate your LLC under a different name. In Illinois, DBA is referred to as an “assumed name.” An assumed name is helpful when you want to operate under a different name for any business expansion or to introduce a new product to your portfolio.

But remember, an assumed name alone cannot give protection to your personal assets. To avail of the benefit of limited liability, you must register and form an LLC.

Doing a Name Search and Name Reservation

It is prudent for you to make sure that the name you have chosen is not identical or similar to any existing entity’s name. For this purpose, you can use the State’s Business Entity Search.

Remember, using designators (plurals, prepositions, capitalizations, etc.) does not make your name unique. For instance, you cannot name your company, Starbuck LLC, or Warner and Bros Agency. 

If you are not ready to incorporate your LLC immediately, you can reserve your chosen name. You can apply with the Secretary of the State in Illinois for this purpose.

Once the Secretary of State has reviewed the application, the name shall be reserved, for 90 days, in the name of and for the applicant’s exclusive use.

Registering Your Business Domain

In this increasingly digitized world, website addresses are how most customers find your business. So before you select a name for your LLC, it is recommended that you ensure that the domain name you need is also available. We would always advise you to check the currently available domain names.

Choose a Resident Agent in Illinois

A registered agent will be the point of contact between the State and your LLC. They’re responsible for receiving all official communications on behalf of your company. In addition, they shall also receive any process service concerning a lawsuit against your company.

Illinois state statutes (805 ILCS 5/5.05) require business entities to appoint and continuously maintain a registered agent and registered office within the State.

Who Can Be a Registered Agent?

Depending on your preference, you may employ the services of a registered agent service provider or be your own agent. You may appoint any one of your friends or family members as well. Having a separate registered agent will help you focus on your core business activities and travel across places for business purposes while not worrying about legal requirements and timely submissions.

The State of Illinois provides specific requirements that your registered agent must comply with. The agent you select for your LLC must be:

• An individual State resident who is above the age of 18 years or
• A business entity that has obtained authorization to conduct business in the State.

The registered agent should have a physical street address in the State and be available during business hours on all working days.

Individual v. Registered Agent Service

While it may be cheaper for you to be the registered agent or appoint a friend or family member, seeking professional help comes with its benefits. It will ensure that the core functions of the LLC are not hindered, as you’ll not have to worry about missing out on any important communication from the authorities that might affect your business’s standing.

You will also have the freedom to travel (either for business or personal reasons) to different places during business hours and still have all the legal requirements fulfilled without any delays as the registered agent will be there, on your behalf, to perform all these functions.

Registered agent services are experts in this field of work. They shall deliver the expertise gained through experience, ensuring that your LLC is up to date with the paperwork and avoiding any unnecessary legal liabilities/costs.

If you appoint a registered agent service, your address will not be present in public records, helping protect your privacy. Finally, the registered agent will manage all your documents and create storage and maintain all your essential documents online to provide easy and instant access to them whenever needed.

Filing Articles of Organization with Illinois

Articles of Organization is a legal document needed to form your LLC. This step is crucial and requires the most caution, as completing this step will ensure the legal presence of your LLC in Illinois. The provisions for filing Articles of Organization are provided in Illinois State Statutes (Section 805 ILCS 180/5-5).

Ensure that you duly fill up the form by clearly stating therein the following details:

• Entity Name and Address
• Registered Agent Name and Registered Office Address
• Business Purpose
• Governing Authority Type
• Effective Date and Duration

Expedient Filing

The usual turnaround time for the State to process your application is around ten days. However, you may pay an additional expedience fee for faster processing.

Public Notice of Formation

As of now, the State does not have any provisions pertaining to a mandatory public notice of formation for your LLC.

Creating an Operating Agreement for your Illinois LLC

An Operating Agreement is like a contract between the members of the LLC. It clarifies aspects of the day-to-day functioning of the company, such as profit sharing, responsibilities of the members, etc.

Although it is not mandatory under Illinois law to have an Operating Agreement, it is recommended that you have one. Illinois’s default laws govern LLCs that do not have an Operating Agreement. An operating agreement provides greater clarity and helps avoid potential legal disputes related to the functioning of the LLC.

You don’t need to file your Operating Agreement with the State of Illinois. However, you should ensure all the members of the LLC consent to the Operating Agreement you have drawn up.

Some of the important and commonly included terms in the Operating Agreement are as follows:

• Date of formation of the LLC.
• Name of the LLC.
• Domicile of the LLC.
• Name, address, and contact details of the members.
• Purpose of the LLC (It is desirable to mention a general purpose to ensure that your functioning isn’t restricted).
• Duration of the membership. 
• Capital contribution by each member. 
• Interests of each member. 
• Responsibilities and other liabilities of each member.
• The profit-sharing ratio between the members.

These are only a few examples, and you can draft your operating agreement by including any provisions you deem necessary for your business model.

Writing the Operating Agreement Yourself v. Hiring a Service.

You can choose to write the Operating Agreement yourself by referring to one of the many templates online. However, we recommend you consult a professional since it ensures that the agreement is comprehensive and does not omit any essential terms. Further, professionals can usually foresee the most common disputes relating to the functioning of an LLC and can account for these possibilities in the Operating Agreement.

Limits of Operating Agreement

You cannot include anything prohibited by the State or Federal laws into your operating agreement. A court can intervene if it deems that the terms of your operating agreement are unreasonable. 

Obtaining an EIN

An Employer Identification Number (EIN) is used for tax administration purposes. The IRS issues it. It is used for business tax filing purposes. It comes in handy while opening a separate business bank account, obtaining business credit cards, applying for certain business loans, obtaining licenses, and employee recruitment matters. Apart from this, an EIN helps you to maintain your corporate veil as it doesn’t expose your Social Security Number and ensures privacy. 

Though not compulsory, you will need an EIN if you fall under any of the categories stated below

• If you are a multi-membered LLC.
• If your single-membered LLC chooses to be taxed as a corporation or an S Corporation. 
• If your single-membered LLC has an excise tax filing requirement or an employment tax filing requirement.  

You may apply for an EIN online, or alternatively, you may apply for it through mail also. The IRS does not charge you for the same.  

File Annual Reports in Illinois 

An annual report is a document used by the authorities to get the latest and updated information about all the business entities operating in the State. The State of Illinois requires you to file an Annual Report for your LLC.

You may file it online using the Illinois State of Secretary’s website. The filing fee is $150 (non-refundable). Alternatively, you may download the form and, after duly filling it, mail it to the following address: 

Department of Business Services Limited Liability Division 501 S. Second St., Rm. 351 Springfield, IL 62756.

The filing fee is $75 (Non-refundable) if you do it via mail.

The due date for filing the Annual report is each year before the first day of the month you formed the LLC. For example, If you formed your LLC on 26th January 2020, the Annual report should be filled prior to 1st January 2021. Reports can be filed starting 60 days before the due date.

Late filings of the Annual Report in Illinois attract a fine of $150 (online) or $75 (by mail). Further, a delay beyond 180 days will result in your LLC getting shut down by the State. Thus, ensuring that your LLC’s Annual report is filed within the due date is crucial. 

Tax liability for your Illinois LLC

The way your LLC will be taxed depends upon the number of members in your LLC. There are four ways in which LLC will be taxed:

• Sole proprietorship: a business owned by a single person
• Partnership: a business owned by multiple people
• C – Corporation: income is split or segregated for taxation
• S – Corporation: tax liability is split between the business and its owners

Federal Tax Liability

You must pay Federal self-employment tax (presently 15.3%) on the profits you take from your LLC. Apart from this, you are also liable to pay Federal Income Tax. The way your LLC will be taxed depends upon the number of members in your LLC. There are four types in which LLC will be taxed: Sole proprietorship; Partnership, C- Corp; S – Corp. The most common ones for an LLC are Sole proprietorship and Partnership.

For sole proprietorship, you’ll have to report the activities of your LLC under Schedule C, Schedule E, and Schedule F of Form 1040. If your LLC has more than one member, it will be taxed as a ‘partnership’ by default. In this case, apart from filing Form 1040, you’ll have to file your partnership return in Form 1065 and provide information in K-1 of each partner. If you wish to be taxed as a C-Corp or S-Corp, you can file Form 8832 and Form 2553, respectively. 

State Tax Liability

Illinois imposes a ‘personal property replacement tax’ on the LLCs directly. The tax rate is 1.5% of the net income for LLCs that do not elect to be taxed as a corporation. This tax is payable to the Illinois Department of Revenue through Form IL-1065.

If you choose to treat your LLC as a corporation for taxation, State Corporate Income Tax becomes applicable to your LLC. The current rate is 5.25% of the taxable income.

Additionally, if you treat your LLC as a Corporation, you will have to pay a personal property replacement tax of 2.5% of the net income. For more information, visit the Illinois Department of Revenue’s Website. 

Apart from the above, if your LLC sells any goods to consumers in the State, you will be liable to pay Sales and Use tax. For this, you have to obtain a seller’s permit. You can apply for the same online using the MyTaxIllinois website portal.

Miscellaneous Taxes

In addition, if your LLC hires employees, you must sign up for Unemployment Insurance Taxes using the IDES TaxNet portal. You will also need to register for Employee Withholding Tax. You can do this by registering your business here.

Permits and Licenses

You don’t need to obtain a general business license to operate in the State of Illinois. However, you will need to obtain licenses from the State depending on the type of business you carry on through your LLC. For example, you need a special license from Illinois to import livestock. Also, if your business intents to sell any taxable goods, you should acquire a seller’s permit known as Illinois Business Authorization. You can visit the State’s website to get this permit.

You may also need to get licenses from the City or town you’re operating in. For example, Chicago requires that businesses obtain a city-specific license before operating in the City. 

These licenses and permits are different for different regions and involve different fees. Make sure to double-check if your LLC requires any licenses or permits. Your LLC may incur fines or legal liability if you don’t obtain the required license. To know more about licenses and permits, refer to the following; 

1. For Federal Licenses and Permits, click here. 
2. For State Licenses and Permits, click here. 
3. For Local Licenses and Permits, contact the local administration office. 

Business Bank Account & Phone Number

Consider opening a separate business bank account, email address, and phone number. Having a different account helps you to avoid mix-ups and helps ensure that your personal assets are not affected in case of insolvency or lawsuits.

Obtaining a separate phone number for your business will ensure that your number is not exposed to the public and that you don’t have trouble separating your business and private calls. In addition, it ensures that your privacy is not impacted, and people concerned with your business can contact you without any confusion. Having a different number also facilitates delegating the responsibility to receive calls to someone else if you’re unavailable.

You can obtain a business phone number through various services providing the same. Look out for the features that suit you the most: toll-free number, international calls, text messages facilities, hardware/software involved, etc., and opt for a service that best suits your needs.

Final Thoughts

Illinois is an excellent choice for you to embark on your business journey. The State has lots of incentives and schemes for new businesses. Participation Loan Program, Illinois Enterprise Zone Program, and River Edge Redevelopment Zone Program (RERZ) are some programs that your LLC may benefit from, depending on the type of business you carry on. Get in touch with your local county or city government office to determine if your LLC is eligible for any of these schemes.

On completing the above steps, your LLC is legally incorporated and ready to do business. We wish you and your business the very best!