HOW TO FORM AN ILLINOIS BUSINESS
ENTITY: OVERVIEW OF ENTITIES
Sean Auton
Horwood, Marcus & Berk Chartered
Chicago Bar Association
September 15, 2011
TYPES OF ENTITIES

Corporations


Nonprofit Corporations


General, Series and L3C
Partnerships


Charity, Education, Politics, Religion, and Social
Limited Liability Companies


General, Closely Held, Professional Services and Medical Corporations
General, Limited and Limited Liability
Associations

Co-Ops
1. CORPORATIONS


Illinois Business Corporation Act of 1983 – 805 ILCS 5/1.01 et. seq.
Requirements


Shareholder
Board of Directors (can be 1 Director)



Officers – As prescribed in the bylaws (805 ILCS 5/8.50)



other than a “Close Corporation” (805 ILCS 5/2A.45)
Special Note: Board of Directors is the body of authority for a corporation
Typically President and Secretary (often “Treasurer” as well)
Same person may hold multiple offices – if set forth in bylaws
Annual Meetings of Shareholders and Directors

Shareholders (805 ILCS 5/7.05) – by earlier of 6 months after end of the
fiscal year or 15 months after the last meeting


Shareholders may act by written consent in lieu of annual meeting (805 ILCS
5/7.10)
Directors – typically concurrent with annual shareholder meeting to conduct
company business

Special Note: Informal Action By Directors (“written consent”) – need right in the
bylaws and unanimous consent (805 ILCS 5/8.45)
1. CORPORATIONS (continued)

Additional Items to Review

Indemnification of Directors, Officers and Employees (805 ILCS
5/8.75)



Option of the corporation
Review making mandatory for directors and at the discretion of the
Board for officers and employees
Shareholder/Voting Agreements/Trusts (805 ILCS 5/7.71, 5/7.65,
5/7.70)

Contractual tool to:





(i) restrict or require voting
(ii) force a sale or purchase of shares
(iii) confer special rights (not “preferred rights”)
Compare to Limited Liability Company Agreements
“C” Corp. or “S” Corp. status is an Internal Revenue Service
issue, not a state formation issue
1. CORPORATIONS (continued)

Specialty Corporations


Professional Service Corporations (805 ILCS 10/1, et. seq.) and
Medical Corporation Act (805 ILCS 15/1, et. seq.)
Shareholders/Directors must be licensed in the profession being
practiced by the corporation (805 ILCS 10/3.4, 805 ILCS 15/13)


Corporate liability shield does not apply to professional liability of
a shareholder (805 ILCS 10/8)


Note: Short time exemption for executor/spouse ownership
Note: Shareholder may not be liable for acts of another shareholder
Need to address buyout provisions for non-qualified shareholders
or default to book value of corporation (805 ILCS 10/11, 805
ILCS 15/16)
2. NONPROFIT CORPORATIONS

General Not for Profit Act of 1996 - 805 ILCS 105/101.01

Key Differences from a For-profit:
et. seq.





Limited Purpose (805 ILCS 105/103.05) – including charitable,
educational, political, religious or social purposes
Shares and Dividends prohibited (805 ILCS 105/106.05)
May or may not have “members” (805 ILCS 105/107.03)
Need a minimum of 3 Directors (805 ILCS 105/108.10
Dissolution distributions must be made subject to either a
requirement to return to the contributor or go to an organization
with a similar purpose or pursuant to a pre-adopted plan (805
ILCS 105/112.16)
2. NONPROFIT CORPORATIONS
(continued)

Helpful reminders for Nonprofit
Corporations



Nonprofit Corporations can make money, pay
bonuses to employees
Nonprofit Corporation does not mean a taxexempt organization – tax exemption is an
Internal Revenue Service issue
Do have directors, bylaws and purpose well
established and agreed upon prior to forming
the corporation
3. LIMITED LIABILITY
COMPANIES

Limited Liability Company Act – 805 ILCS 180/1.1 et.

Requirements:
seq.






Name must contain the term “limited liability company”, “L.L.C.”
or “LLC” (805 ILCS 180/1-10)
Member
Indication if “member managed” or “manager managed” on the
Articles of Organization (805 ILCS 180 5/5)
No requirement for “corporate formalities” (805 ILCS 180/1010(c))
No requirement for an “Operating” or “LLC” Agreement – default
to provisions in the act (805 ILCS 180 15-5) – BUT – you should
have a written agreement among the members
LLC Agreement can modify any provision of the LLC Act, except
as set forth in 805 ILCS 180/15-5
3. LIMITED LIABILITY
COMPANIES (continued)

Top issues to consider with an LLC Agreement:

Management and Authority


Member managed or manager managed
If manager managed, manager must be a “person” (805
ILCS 180/1-5)



A “person” is an individual, partnership, limited partnership,
limited liability company, trust, estate, association, corporation
or other judicial being – NOT a “board”
In either member managed or manager managed
companies, make clear how decisions are made (majority,
supermajority, member approval and tie-breakers)
Note: Illinois requires on the Articles of Organization what
type of management the LLC has, and this trumps what an
LLC Agreement may say
3. LIMITED LIABILITY
COMPANIES (continued)

Top issues to consider with an LLC Agreement
(continued):

Members, Allocations and Distributions





Differentiate “Preferred Members” from “Members”
Remember to differentiate “tax allocations” from
“distributions” and review whether to have a mandatory
tax distribution
Don’t hesitate to use examples of distributions
Always add a tax savings clause
Always review the allocations and distributions with the
company accountant
3. LIMITED LIABILITY
COMPANIES (continued)

Top issues to consider with an LLC
Agreement (continued):

Termination & Dissociation
Review when, if ever, a member may terminate or
be terminated
 Review when, if ever, a member may leave or
“dissociate” from the LLC (805 ILCS 180/35-50)
 Note: Illinois has a “put” right for members of a
member managed LLC dissociating (805 ILCS
180/35-60(d)) – unless otherwise set forth in an
LLC Agreement

3. LIMITED LIABILITY
COMPANIES (continued)

Top issues to consider with an LLC
Agreement (continued):

Fiduciary Duties and Indemnification
Review fiduciary duties of a manager and member
 Note: Illinois is not Delaware – cannot eliminate
fiduciary duties of a manager
 Member managed LLC – members owe fiduciary
duties to each other (805 ILCS 180/15-3) –
including competition with the company
 Default provision is the LLC shall indemnify a
member or manager (805 ILCS 180/15-7(a))

3. LIMITED LIABILITY
COMPANIES (continued)

Top issues to consider with an LLC Agreement
(continued):

Information Rights (805 ILCS 108/1-40(b) and 1015)




1-40(b) – Access to articles of organization, members,
contributions, tax returns and LLC Agreements
10-15 – Access to all LLC records
Note: Operating Agreement can NOT “unreasonably” restrict
such access (805 ILCS 180 15/5(b)(1)) – but can include
Confidentiality and Non-Disclosure requirements
Member is always entitled to a copy of the LLC Agreement
(805 ILCS 180/10-15(b))
3. LIMITED LIABILITY
COMPANIES (continued)

Non-standard Limited Liability Companies

Series Limited Liability Companies (805 ILCS 180/3740)






Established in the LLC Agreement and filing of a certificate of
designation
Note: Illinois requires separate filing for each series to be
established
Series can segregate assets and liabilities
Each series can have different members and managers
Each series can have its own “operating” agreement
Under Illinois law, the series can consolidate their operations
as a single taxpayer
3. LIMITED LIABILITY
COMPANIES (continued)

Series Limited Liability Companies (805 ILCS
180/37-40) (continued)

Issues with Series LLCs




Unsure creditor/non-consolidation protection - while
Illinois states a series should be treated “as a separate
entity” – no court decisions affirm this position
Pursuant to IRS ruling last year, cannot consolidate tax
return unless all members of each series are identical
and own identical percentages
Regulators are growing increasingly hostile to entities
Good luck (1) getting your client to follow proper naming
form and segregation for each series and (2) explaining
what a series is to each person your client does business
with
3. LIMITED LIABILITY
COMPANIES (continued)

Low-profit Limited Liability Company “L3C” (805
ILCS 180/1-26)



Created for “Program Related Investments”, as
determined by the Internal Revenue Service
Organized to (i) further one or more charitable or
educational purposes, (ii) no significant purpose is the
production of income or capital appreciation, and (iii)
no purpose to accomplish one or more political or
legislative purposes.
Name must contain the term “L3C” (805 ILCS 180/110)
3. LIMITED LIABILITY
COMPANIES (continued)

Low-profit Limited Liability Company “L3C” (805
ILCS 180/1-26) (continued)

Issues with L3Cs




Effort tied to corresponding Federal Legislation, the ProgramRelated Investment Promotion Act of 2008 – but legislation
never passed
No tax issues resolved by merely using an L3C
Unclear if anything accomplished by choosing an L3C that
could not already be accomplished in an LLC Agreement
American Bar Association position is to not include L3Cs in
the model LLC Act
4. PARTNERSHIPS

Uniform Partnership Act (1997) – 805 ILCS
206/100 et. seq.


Note: Includes “Limited Liability Partnerships”
(805 ILCS 206/1001)
Uniform Limited Partnership Act (2001) –
805 ILCS 215/0.01 et. seq.
4. PARTNERSHIPS (continued)

General Partnerships




The association of 2 or more persons to carry on a
business for profit is a partnership, whether or not
they intend to form or file a statement (805 ILCS
206/202(a))
All partners are liable jointly and severally for all
obligations of the partnership (805 ILCS 206/306)
Partners owe fiduciary duties to each other (805 ILCS
206/404)
Partnership Agreement can modify any provision of
the Partnership Act, except as set forth in 805 ILCS
206/103
4. PARTNERSHIPS (continued)

General Partnerships (continued)

Limited Liability Partnerships (805 ILCS 206/1001 et.
seq.)



To elect, must file with the Secretary of State, and name
must include “LLP”, “RLLP” language
Any obligation or liability of the LLP incurred is solely the
obligation of the LLP, not the partners (805 ILCS 206/306(c))
An LLP is a “general partnership” under the Act (805 ILCS
206/201)

Note: Certain regulatory authorities may not allow their
regulated entities to be LLCs, just “corporations or
partnerships”
4. PARTNERSHIPS (continued)

Limited Partnerships






Certificate of Limited Partnership must be filed (805 ILCS
215/201)
Name must contain “limited partnership”, “L.P.” or “LP” (805 ILCS
215/108)
Must have a General Partner, who is liable for all obligations of
the LP (805 ILCS 215/404)
Limited Partners are not liable for the obligations of the LP (805
ILCS 215/303)
General Partner has exclusive authority for the LP (805 ILCS
215/406)
Limited Partnership Agreement can modify any provision of the
Limited Partnership Act, except as set forth in 805 ILCS 215/110
5. Associations


Professional Association Act – 805 ILCS
305/0.01 et. seq.
Co-Operative Act – 805 ILCS 310/1 et.
seq.


Agricultural Co-Operative Act – 805 ILCS
315/1 et. seq.
Cemetery Association Act – 805 ILCS
320/0.01 et. seq.
5. Associations (continued)

Association Issues, generally




Very specialized entities
Distributions may be restricted, but are
allowed
Governance by a Board, selected by the
members
Membership restricted to the common group
(i.e. “professionals”, “agricultural producers”,
etc.)
EXHIBITS






1. Form Illinois Articles of Incorporation
2. Form Corporate Checklist
3. Form Bylaws
4. Form Illinois Articles of Organization
5. Form LLC Checklist
6. Form Single Member, Manager Managed
LLC Agreement
SPEAKER CONTACT
INFORMATION
Sean Auton
500 West Madison Street
Suite 3700
Chicago, Illinois 60661
voice: (312) 606-3226
fax: (312) 267-2229
cell: (312) 213-8915
e-mail: sauton@hmblaw.com
website: www.hmblaw.com