Melvin J. Fein
Starting a Business in Illinois
Most analysts and forecasters are predicting Entrepreneurs to be the single most driving economic force of the next century. This article is intended to give the reader a brief overview of some of the initial decisions involved in starting a business. The focus taken here is on Illinois start-ups. Laws of other states should be reviewed carefully for their differences.
Once you have decided on the idea, product or service you intend to provide for your new business, you must decide on the appropriate Legal Form of Operation. The basic ones discussed here will be:
a) sole proprietorship,
c) limited partnership,
e) limited liability companies (LLC)
Sole Proprietorship - the sole proprietorship is the simplest business form to use. Depending on the business involved, this form of ownership requires the least initial paper work. A single owner may only need to comply with the "assumed name" statute (if an assumed name is used) and obtain a business license from the locality where the business is going to be operated. There are distinct advantages to this form of operation from a control standpoint. The sole proprietor has complete control over all aspects of the business. There are no partners or shareholders with different goals and agendas to reconcile. Accounting requirements such as tax registrations are relatively common to the various forms of ownership and should be discussed with a qualified business accountant.
Partnerships - The law in Illinois governing partnerships is the Illinois Uniform Partnership Act and the Illinois Revised Uniform Limited Partnership Act. Partnership is defined as being two or more persons associating themselves as co-owners for the purpose of carrying on a business for profit. A "person" for purposes of Partnership Law means: individuals, partnerships, corporations and other associations.
Whether a partnership exists or not depends on the actual contract that is formed between the parties. A partnership is never created by operation of law. It must be formed by the express or implied intentions to form a partnership relationship. Since a partnership is a creation of contract, the elements of a contract must exist to form a valid entity: competency of contracting parties, subject matter clearly delineated and a meeting of the minds as to their intention to form this contractual relationship. Written articles of partnership are not required and the relationship can be created by verbal agreement. However, since a partnership is controlled by the agreement creating it, a written agreement clearly delineating the rights, duties, and liabilities of the partners is strongly advised and will avoid unnecessary problems in the future.
The Illinois Assumed Business Name Act outlines certain duties placed upon persons doing business in the state. A partnership may conduct business in Illinois without filing a certificate under the Act, as long as the name of the entity includes the real name of each person transacting business. If this information is not included in the entity name, a certificate must be filed in the office of the County Clerk of each county in which the partners are or intend to conduct business.
Limited Partnerships - The Revised Uniform Limited Partnership Act controls limited partnerships in Illinois. Under the Act, a "limited partnership" is one that is formed by two or more persons under the laws of Illinois and has one or more general partners and one or more limited partners. The unusual characteristic of a limited partnership is that a limited partner may limit any potential liability in the venture to his or her capital contribution as long as there is at least one general partner whose liability continues to be unlimited. This form of ownership is primarily used in an investor situation, where control and management of the business is vested in the general partner. A limited partner's interest in the partnership is considered personal property and lends itself to transferability. It is frequently used in large real estate transactions allowing limited partners to more readily move in and out of the investment.
A limited partner is not bound by the obligations of the partnership, beyond the capital invested, unless he or she is also a general partner or, in addition to the rights and powers of a limited partner he or she participates in the control of the business. If a limited partner receives the return of his or her contributed capital, he or she remains liable to the limited partnership for one year for the monies received in order to discharge obligations to third party creditors of the partnership.
The profits and losses of a limited partnership must be allocated among the partners according to the written partnership agreement or in the absence of clear direction in that agreement, according to the contributed capital made by each partner to the business. Clarity and careful drafting is particularly important in a limited partnership situation to accomplish the limited liability goals of this business form.
Corporations - Illinois corporations for profit are governed by the Illinois Business Corporation Act of 1983. Close corporations are subject to the provisions of the Business Corporation Act of 1983, and may become specifically subject to Article 2A of that Act, entitled Close Corporations, which became effective January 1, 1991.
The corporate ownership form is frequently the entity of choice in starting a new business. Because the corporation exists as a separate entity, by the grace of the state, it has certain rights and obligations.
The corporation must be treated separately in all respects. The Corporation Act must be followed: Annual minutes prepared, Separate funds and accounting, act within the confines of its Articles of Incorporation and according to the by-laws adopted by its shareholder(s). Once the corporate requirements are met, one of the most important advantages of a corporation is the "corporate veil" of limited liability. This "veil" means that the corporation is liable for its own obligations. Therefore, you are personally protected since you will be just an employee of the corporation, even though you may own all or most of the stock. Be cautioned however, an owner may still be liable for his own negligence (such as driving the company vehicle in a negligent manner) and for any debt or obligations of the corporation that he or she guarantees personally.
Partners forming a corporation can divide ownership into shares, responsibilities can be defined by a Shareholder Agreement. A Shareholder Agreement is just as critical in a corporation with more than one shareholder as a Partnership Agreement is to a partnership. It can be used to avoid issues that develop in any good relationship by defining expectations before problems occur. Possibly the most important advantage, of a Shareholder Agreement, is that it can be used to determine the arrangement in the event one party wishes to leave, retire, or dies.
Corporations as separate entities are also taxpayers. This can result in double taxation as the corporation pays tax on its net income.
This situation is usually remedied by proper tax and accounting elections and advice. Salaries are the most common way to avoid having net income in the corporation. Salaries must be considered reasonable to the IRS or they may be considered a dividend and get taxed twice. In view of some of the huge corporate salaries out there, there appears to be a broad definition of reasonableness.
Corporations may cost slightly more to operate from a legal and accounting standpoint, but depending on your personal assets, the limited liability alone, makes it well worthwhile.
Limited Liability Companies - LLC's in Illinois are governed by The Illinois Limited Liability Company Act, effective January 1. 1994. The LLC is a very progressive form of ownership and is gaining in popularity all across the country. It has the advantages of limited liability for its "members" along with taxation similar to a partnership avoiding double taxation. There is slightly more flexibility in transferring of ownership and less restrictive in who can be an owner.
For purposes of this article however, the LLC is more expensive to form and to keep in good standing with the State. It has its place under the correct circumstances, but for most start-up applications, the same results can be achieved at lower cost by forming a standard corporation and making the appropriate tax and accounting decisions.
"Fein Print" . . .
The information contained in this article is intended as a general outline of the law in a particular area and should not be viewed as specific legal advice. A qualified attorney, licensed to practice in your state should review individual circumstances.
Melvin J. Fein is an experienced Attorney practicing in the area of business law in the Metropolitan Chicagoland area. He counsels businesses from small start-ups to well established midsize companies.
We have asked Mr. Fein to write a monthly column, translating an aspect of business law, most likely to be of interest to our readers. He can be reached directly at his Naperville, IL. Office 630-983-5255 or via E-mail at: MJFLAWPC@aol.com
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