Running your own business is exciting no matter what stage you’re in! Whether you’re just starting out as a freelancer or you’ve expanded to a multi-six-figure enterprise.
As you grow, you’ll hit a point when it’s time to get your legal ducks in a row – hopefully sooner than later. Forming an S Corp is a natural step for a growing Business-of-One. And it’s simpler than it sounds.
But you’ll run into some complex paperwork and a bit of legal talk that might be intimidating.
To set up an S Corp in Illinois, you need to:
- Register your business with the Secretary of State
- Get a federal Tax ID
- Set up an S Corp with the IRS.
If that sounds tough, don’t worry. We’ve got you covered.
Our guide to forming an S Corp in Illinois explains everything you need to know, step by step, to set up your business and even save money on taxes in the Prairie State.
Forming an S Corp in Illinois
Forming an S Corp in Illinois for your business is a straightforward process. You just have to understand the steps involved, including forming an LLC and what it means to be an S Corp in Illinois.
Should You Form an S Corp?
Creating an S Corp in Illinois will likely come with tax benefits for a Business-of-One.
That’s because Illinois and the federal government both tax S Corps differently from self-employed individuals. The main difference is how much you’ll pay in what’s commonly called self-employment tax, the 15.3% payroll tax that covers Medicare and Social Security.
If you’re currently operating as a sole proprietor, you owe self-employment tax – as well as Illinois and federal income tax – on all of the taxable income you make doing business.
As an S Corp, you pay yourself a salary out of your business, and you pay the self-employment tax on that amount only. You pay federal income tax on that amount plus profit distributions, aka the additional payments you make to yourself outside of your salary. (If you’re the sole owner, your profit distribution amount is probably equal to the rest of your business income for a tax year).
Illinois taxes an S Corp owner differently, too. You pay income tax based on your salary and distributions. Plus you pay an S Corp tax rate of 1.5% on your business’s full taxable income.
Long story short: Forming an S Corp has a chance of reducing the amount you owe in federal taxes. It’ll add a little to what you owe in Illinois state taxes, but most likely helping you save at the federal level.
Talk with an accountant familiar with Illinois tax laws about whether forming an LLC in Illinois is the best move for your business.
Forming an LLC
S Corp is a tax treatment, meaning it determines how you’re taxed by the IRS. And you need to have a business entity (other than a sole proprietorship) – like an LLC – to request this treatment.
You can technically file as an S Corp if you have a corporation, but that negates the potential tax benefits of being a corporation. If your business is incorporated, you’re generally better off filing as a C Corp. Instead, as a Business-of-One, to file as an S Corp, you most likely want to form an LLC (limited liability company), a simpler legal entity designed for small businesses.
The main difference between an LLC and an S Corp is that an LLC is a legal structure, while an S Corp is a tax treatment. They’re not opposing options. They usually work in tandem.
In Illinois, an LLC can be an S Corp by filing an S Corp election with the IRS.
Steps to Form an S Corp in Illinois
Forming an S Corp in Illinois, or anywhere in the U.S., requires first forming an LLC with the state and then electing S Corp status with the IRS.
Follow these steps to form your LLC and S Corp in Illinois.
1. Choose an LLC Name
You’ll find when you go to register an LLC one of the first things you need is a name. Don’t stumble on this step! Prepare by choosing an LLC name in advance, so all you have to do is fill out the forms when you’re ready to file.
Your name carries a lot of weight for your business, but don’t let this step stress you out.
Start with a name that resonates with you. You have to love it and feel like it nails your brand and what you do. So listen to your gut.
Then add the finishing touches:
- An LLC’s name has to include “LLC,” “Limited Liability Co.” or something similar that indicates the company’s legal status. It can’t include “Inc.,” “Corp.” or something similar that suggests it’s a corporation.
- Your LLC’s name has to be unique in Illinois. You can search through the Office of the Illinois of Secretary of State to see whether another business is already using the name in Illinois.
- Your LLC’s name can’t infringe on any trademarks, whether for businesses in Illinois or anywhere else in the country. So you can’t be “Apple Computers LLC” or “Ronald McDonald’s LLC.”
The name of your LLC doesn’t necessarily have to match the brand name of your business. Though, for many small businesses, that’s the most likely direction.
For example, if you’re a realtor in Champaign, you might market your business under the name “Champaign Realty” to attract the right customers. But you could name your business something like “Best Realty, LLC.” if you want to be open to expansion in your business’s future.
2. Choose a Registered Agent
The next requirement you’ll face when you register your LLC is listing a registered agent.
This sounds like a whole thing, but it’s pretty simple. A registered agent is just the person or company that can accept legal documents on behalf of your company.
The registered agent will receive:
- Tax notices from the state.
- Business registration renewal notices from the Illinois Secretary of State.
- Court papers in the event your business is involved in a lawsuit or any legal action.
Don’t fret. You can be your own registered agent in Illinois. Phew!
You can name anyone, including yourself, and even other owners and employees of the business, as your LLC’s registered agent. You have the option to pay a registered agent service to accept documents for your business, but that probably isn’t necessary for a Business-of-One.
3. File Your Articles of Organization
Forming your LLC requires that you file articles of organization, simple documents that explain what your company does and how it’s organized.
Our free articles of organization template for LLCs gives you an outline and explains the sections most articles of organization need to include:
- Entity name and type.
- Registered agent name and address.
- Name and address of members (owners/shareholders).
- Purpose of the business.
- Name and address of the organizer (you or your lawyer).
- Effective date.
If you file online through the Illinois Secretary of State, your articles of organization will be formed automatically as you answer the questions in the application. The app offers a set of standard provisions for an LLC that you can simply agree to include, rather than writing your own.
If you want to create your own provisions, you have to file by paper – delivered by mail, fax or in person in Springfield or Chicago – using Form LLC-5.5 from the Illinois Secretary of State.
After you submit your application, you’ll receive a Certificate of Registration and tax Account ID number by mail or online, depending on how you register. If you register online or in person, you’ll get the Certificate of Registration within two weeks. If you register by mail, it’ll take six to eight weeks.
4. Create an Operating Agreement for Your LLC
Anytime during the formation of your LLC, you can create an official operating agreement for the company.
An LLC operating agreement is like a set of mini-bylaws for your company. It explains how major decisions are made in the business, like profit distribution, ownership additions and changes, sale or dissolution, and management.
An operating agreement for a single-member LLC will be simple, but you should still have one, even if it feels like an agreement with yourself. Creating an operating agreement helps legally establish your LLC as an entity separate from yourself, which is key to getting the protections it offers.
Creating an operating agreement is separate from the process of registering your LLC. You won’t file it with the staete. But it’s an important step in the formation of your LLC and, therefore, forming an S Corp.
5. Get an EIN
When you file to request S Corp tax status, you’ll need to include your Employer Identification Number (EIN), a number from the IRS you use on any tax forms for the company.
Getting an EIN from the IRS is free and surprisingly easy.
Once your LLC filing has been accepted by the Illinois Secretary of State and your business is officially registered, just go online to the IRS EIN Assistant. You’ll enter basic information about your business, including:
- How many members are in your LLC?
- Who is the Responsible Party of the LLC?
- What is the legal name of the LLC?
- What is the trade name/“doing business as” name (if applicable)?
- What does your business or organization do?
If you apply for your EIN online, it’s processed immediately, and you’ll get your EIN as soon as the application is complete.
You could instead file by paper using Form SS-4. It’ll take four days to get an EIN if you submit by fax or four weeks if you submit by mail.
6. File Form 2553 to Elect S Corp Tax Status
Now, finally, you can file for S Corp status!
By default, the IRS will tax your LLC as a sole proprietorship (if you’re the only owner), or a partnership (if there are multiple owners). You have to elect to be taxed as an S Corp instead, which means –— you guessed it! –— a form.
Fill out Form 2553 and submit it to the IRS to elect S Corp tax treatment.
It requires just a few questions, but you might be tripped up on a couple of them. Consult an accountant for the best way to answer these for your business.
Here’s what the form includes:
- Business name, address and EIN.
- Effective tax year. You’re probably filing the form on some date other than Jan. 1, but accountants typically advise entering the effective tax date of Jan. 1 for the year you’re filing (i.e. if you file on Sep. 3, 2022, enter Jan. 1, 2022).
- Type of tax year. Most likely you use a calendar year, but you have the option to enter a different fiscal year if your accountant advises it. This is much more common for corporations.
- Name, address and ownership percentage for each owner. If it’s just you, list yourself as 100% owner.
- Social Security number or EIN of each owner. You’ll enter your Social Security number, not the company’s EIN, unless you also have an EIN for yourself.
- Qualified Subchapter S Trust. This is relevant if you have a trust that holds any stock in the company. Work with an accountant if you want to set this up.
The IRS typically processes S Corp applications within 60 days. If you don’t receive a response to your application within that time, call 800-829-4933 to check on your S Corp status.
Does Illinois Recognize S Corps?
Not every state recognizes the federal S Corp election, but Illinois does. In the state of Illinois, your federal S Corp will be taxed as an S Corp for state tax purposes, as well.
You don’t have to file separately to have your S Corp recognized in the state. Your IRS S Corp election is sufficient.
Once your S Corp status is accepted, you can file Illinois and federal taxes for your LLC as an S Corp.
How Is an S Corp Taxed in Illinois?
As an S Corp owner in Illinois, you’ll pay two main types of taxes on the money your business makes:
- Personal income tax: Illinois income tax rate of 4.95% on your adjusted gross income, including your salary and profit distributions from the LLC, minus deductions.
- Personal property replacement tax: Paid on net income for the business. The rate varies based on the business type, and the Illinois S Corp tax rate is 1.5%.
How Much Is an S Corp in Illinois?
Because you don’t have to separately register an S Corp in Illinois, there’s no state-based fee to obtain this tax election. However, you’ll pay these fees to register your LLC with the state, which is required to become an S Corp:
- File articles of organization: $150
- Reserve a name before registering your LLC (optional): $25
- File an annual report: $75 per year
Resources for Creating an S Corp in Illinois
Bookmark these resources to help you through the process of registering your LLC and forming an S Corp in Illinois.
Illinois S Corp Resources
- Office of the Illinois Secretary of State
- Filing your LLC articles of organization in Illinois
- Filing an LLC annual report in Illinois
- MyTax Illinois by the Illinois Department of Revenue
- About IRS Form 2553
- Apply for an Employer Identification Number (EIN) Online
Collective Guides for S Corporations
- LLC vs S Corp: The Difference and Tax Benefits
- The Ultimate Guide to Getting Your Freelance Taxes Right
- Business Entities for Freelancers: Which One Is the Best?
- Started an LLC? These Are the Most Important Things to Do First
FAQs about Forming an S Corp in Illinois
Here are answers to some commonly asked questions about forming an S Corp.
What Is an S Corp?
An S Corporation is an IRS designation for a company. It treats a company, like an LLC, as a pass-through entity, which means its income or losses are claimed by the owners for tax purposes. An S Corp doesn’t pay corporate tax; instead, the owners pay individual income tax on the business income.
Is an S Corp an LLC?
S Corp status isn’t the same thing as LLC. S Corp is a tax treatment by the IRS that determines how you and your company pay taxes on business income.
LLC (limited liability company) is a type of legal structure that separates you from your business’s legal or financial obligations. An LLC and other types of business entities can elect to be taxed as an S Corp, which could come with a reduced tax bill.
Who Can Be Part of an S Corp?
All S Corp shareholders (owners) have to be U.S. residents, and the business can’t have more than 100 shareholders.
How Do You Form an S Corp?
To form an S Corp, you have to:
Then, maintaining your S Corp status just requires filing a form (and usually paying a fee) with your state each year to keep your LLC information up to date.
Do You Need a Lawyer to Form an S Corp?
You can file all the paperwork required to register an LLC and elect S Corp tax treatment on your own as a business owner. As a Business-of-One and single-member LLC, you might be able to answer all the questions and make the decisions without help.
You might want to consult an accountant to make sure you understand all of the legal tax terms and are setting up the business entity that’s in your best interest. And you most likely want to consult an attorney if more than one owner is involved in the business.
What Are S Corp Requirements?
As long as your business has fewer than 100 owners and they’re all U.S. residents, you should be eligible for S Corp status. To ensure you’re paying taxes properly, the IRS requires you pay yourself (and all owners) salary that’s considered reasonable compensation for your work.
TL;DR: Ready to Form an S Corp in Illinois?
Forming an S Corp in Illinois or anywhere in the U.S. is a straightforward but intimidating process for a new business owner. You’ll deal with multiple government agencies to register your LLC with the state and then file for S Corp status with the federal government — but if you follow our guide and understand the process, it’s really not so tricky.
Once you’re set up as an S Corp, you can enjoy potentially significant tax savings on your federal income taxes, while you’ll owe a small extra tax to the state of Illinois. Plus, you’ll be set up to be protected legally in case of a lawsuit or debt obligations on your business.
If you still have questions about the process or just want to save yourself time — so you can focus on running your business — talk with an Illinois tax pro before getting started.