Each state offers its own business structures, each with different filing requirements and tax implications. Below, you’ll find a brief explanation of the most common business structures in Illinois.
General partnership: The simplest of the business structures, general partnerships are formed automatically when two or more individuals begin working together. General partnerships don’t have the reporting or annual meeting requirements that corporations have, nor do they have to follow as strict a set of rules on keeping their personal and business assets separate. That said, general partners have unlimited liability if the partnership is sued or falls into debt. It is a good idea for all general partnerships to work with a entity formation lawyer to draft an agreement governing each partner’s rights and responsibilities to the partnership.
Limited partnership: In a limited partnership, there is one or more general partner who holds management responsibilities as well as liability for the partnership. The limited partners are not liable for any debts of the partnership, and only stand to lose the amount they invested in the partnership. Organizations may also choose to form a limited liability limited partnership (LLLP), a relatively new form of partnership. These partnerships have both general and limited partners, like the limited partnership, but offer some liability protection to general, as well as limited, partners.
Limited liability partnership (LLP): These entities offer liability protection to the partners in a general partnership. General partnerships can choose to register with the state as an LLP by filing a “Statement of Qualification,” and the partners will be shielded from personal liability for the debts of the partnership during the period that they have been registered as an LLP.
Not-for-profit organization: This is a broad term used to indicate an organization that was created not for private gain. Some not-for-profit organizations may occasionally make a profit, but unlike a for-profit organization, a not-for-profit organization will not distribute those earnings for private gain. The terms “not-for-profit” and “nonprofit” are often used interchangeably. In Illinois, the term “not-for-profit” is most commonly used and indicates an organization that has been incorporated with the Secretary of State and meets specific criteria stated in the Illinois General Not for Profit Corporation Act. Nonprofit organizations can be structured in numerous ways and may apply for recognition by the IRS of tax-exempt status under Section 501(c)(3) or another applicable provision of the Internal Revenue Code. Our experienced nonprofit attorneys at Pluymert, MacDonald, Hargrove & Lee, Ltd. have focused on helping charitable, religious, educational, scientific and other qualified organizations for years and can guide your organization through the process of formation and registration as a nonprofit and applying for tax-exempt status.
Limited liability company (LLC): These organizations are a popular choice for small businesses. LLCs offer a blend of qualities of a partnership and those of a corporation. Rather than being known as “partners,” the individuals or organizations forming an LLC are known as “members.” Both individuals and entities can serve as members of an LLC. In some cases, nonprofit organizations have found it beneficial to use an LLC as a way to partner with for-profit organizations. As with a partnership, the LLC itself does not pay taxes, but passes both profits and losses through to its members. LLCs must meet annual reporting requirements that do not apply to partnerships. An LLC can have a single owner and be taxed as a sole proprietorship, but it can also have an unlimited number of members and be taxed as a partnership. Like partnerships, LLCs with more than one member are advised to work with a lawyer to create an operating agreement when forming.
Low-Profit LLCs: Illinois offers charitable or educational organizations the option of registering as a “low-profit LLC,” or L3C. These organizations are intended to be a blend of a nonprofit and for-profit organization. L3Cs should be designed to provide a social benefit rather than to generate profits, but unlike a nonprofit, an L3C can distribute profits to investors and owners after all taxes are paid. L3Cs can be a great way to draw investors to contribute funds for a charitable purpose while providing the possible benefit of a return on that investment.
S corporation: This is the name for a designation offered by the IRS to corporations with no more than 100 shareholders and only one class of stock. To qualify, a corporation first must be formed at the state level and a special election filed with the IRS thereafter. S-corps protect owners and shareholders from personal liability, and, like an LLC, taxes and profits are passed along to the owners of the corporation. S-corps must issue stock, hold annual shareholder and director meetings, and meet certain reporting requirements. Corporations can be for-profit or nonprofit.
C corporation: If a corporation does not file an election to be treated as an S corporation (IRS Form 2553), it is deemed a C corporation for tax purposes. C-corps are taxed directly, which results in double taxation – first at the corporate level, then at the personal level for shareholders who must also pay taxes on dividends. Unlike with S corps, there is no limit on the number of individuals who can be shareholders in a C corp.