HOW TO FORM AN ILLINOIS BUSINESS HOW TO FORM AN ILLINOIS BUSINESS ENTITY: OVERVIEW OF ENTITIESENTITY: OVERVIEW OF ENTITIES

Sean AutonSean AutonHorwood, Marcus & Berk CharteredHorwood, Marcus & Berk Chartered

Chicago Bar AssociationChicago Bar AssociationSeptember 15, 2011September 15, 2011

TYPES OF ENTITIESTYPES OF ENTITIES Corporations Corporations

General, Closely Held, Professional Services and Medical General, Closely Held, Professional Services and Medical CorporationsCorporations

Nonprofit CorporationsNonprofit Corporations Charity, Education, Politics, Religion, and SocialCharity, Education, Politics, Religion, and Social

Limited Liability CompaniesLimited Liability Companies General, Series and L3CGeneral, Series and L3C

PartnershipsPartnerships General, Limited and Limited LiabilityGeneral, Limited and Limited Liability

AssociationsAssociations Co-OpsCo-Ops

1. CORPORATIONS1. CORPORATIONS Illinois Business Corporation Act of 1983 – 805 ILCS 5/1.01 Illinois Business Corporation Act of 1983 – 805 ILCS 5/1.01 et. et.

seq.seq. RequirementsRequirements

ShareholderShareholder Board of Directors (can be 1 Director)Board of Directors (can be 1 Director)

other than a “Close Corporation” (805 ILCS 5/2A.45)other than a “Close Corporation” (805 ILCS 5/2A.45) Special Note: Board of Directors is the body of authority for a Special Note: Board of Directors is the body of authority for a

corporationcorporation Officers – As prescribed in the bylaws (805 ILCS 5/8.50)Officers – As prescribed in the bylaws (805 ILCS 5/8.50)

Typically President and Secretary (often “Treasurer” as well)Typically President and Secretary (often “Treasurer” as well) Same person may hold multiple offices – if set forth in bylawsSame person may hold multiple offices – if set forth in bylaws

Annual Meetings of Shareholders and DirectorsAnnual Meetings of Shareholders and Directors Shareholders (805 ILCS 5/7.05) – by earlier of 6 months after end of the Shareholders (805 ILCS 5/7.05) – by earlier of 6 months after end of the

fiscal year or 15 months after the last meetingfiscal year or 15 months after the last meeting Shareholders may act by written consent in lieu of annual meeting (805 ILCS Shareholders may act by written consent in lieu of annual meeting (805 ILCS

5/7.10)5/7.10) Directors – typically concurrent with annual shareholder meeting to Directors – typically concurrent with annual shareholder meeting to

conduct company businessconduct company business Special Note: Informal Action By Directors (“written consent”) – need right in Special Note: Informal Action By Directors (“written consent”) – need right in

the bylaws and the bylaws and unanimous consentunanimous consent (805 ILCS 5/8.45) (805 ILCS 5/8.45)

1. CORPORATIONS 1. CORPORATIONS (continued)(continued)

Additional Items to ReviewAdditional Items to Review Indemnification of Directors, Officers and Employees Indemnification of Directors, Officers and Employees

(805 ILCS 5/8.75)(805 ILCS 5/8.75) Option of the corporationOption of the corporation Review making mandatory for directors and at the Review making mandatory for directors and at the

discretion of the Board for officers and employeesdiscretion of the Board for officers and employees Shareholder/Voting Agreements/Trusts (805 ILCS 5/7.71, Shareholder/Voting Agreements/Trusts (805 ILCS 5/7.71,

5/7.65, 5/7.70)5/7.65, 5/7.70) Contractual tool to:Contractual tool to:

(i) restrict or require voting(i) restrict or require voting (ii) force a sale or purchase of shares(ii) force a sale or purchase of shares (iii) confer special rights (not “preferred rights”)(iii) confer special rights (not “preferred rights”) Compare to Limited Liability Company AgreementsCompare to Limited Liability Company Agreements

““C” Corp. or “S” Corp. status is an Internal Revenue C” Corp. or “S” Corp. status is an Internal Revenue Service issue, Service issue, notnot a state formation issue a state formation issue

1. CORPORATIONS 1. CORPORATIONS (continued)(continued)

Specialty CorporationsSpecialty Corporations Professional Service Corporations (805 ILCS 10/1, Professional Service Corporations (805 ILCS 10/1, et. et.

seqseq.) and Medical Corporation Act (805 ILCS 15/1, .) and Medical Corporation Act (805 ILCS 15/1, et. et. seqseq.).)

Shareholders/Directors must be licensed in the Shareholders/Directors must be licensed in the profession being practiced by the corporation (805 ILCS profession being practiced by the corporation (805 ILCS 10/3.4, 805 ILCS 15/13)10/3.4, 805 ILCS 15/13)

Note: Short time exemption for executor/spouse ownershipNote: Short time exemption for executor/spouse ownership Corporate liability shield does not apply to professional Corporate liability shield does not apply to professional

liability of a shareholder (805 ILCS 10/8)liability of a shareholder (805 ILCS 10/8) Note: Shareholder may not be liable for acts of another Note: Shareholder may not be liable for acts of another

shareholdershareholder Need to address buyout provisions for non-qualified Need to address buyout provisions for non-qualified

shareholders or default to book value of corporation (805 shareholders or default to book value of corporation (805 ILCS 10/11, 805 ILCS 15/16)ILCS 10/11, 805 ILCS 15/16)

2. NONPROFIT CORPORATIONS2. NONPROFIT CORPORATIONS General Not for Profit Act of 1996 - 805 ILCS General Not for Profit Act of 1996 - 805 ILCS

105/101.01 105/101.01 et. seq.et. seq. Key Differences from a For-profit:Key Differences from a For-profit:

Limited Purpose (805 ILCS 105/103.05) – including Limited Purpose (805 ILCS 105/103.05) – including charitable, educational, political, religious or social charitable, educational, political, religious or social purposespurposes

Shares and Dividends prohibited (805 ILCS 105/106.05)Shares and Dividends prohibited (805 ILCS 105/106.05) May or may not have “members” (805 ILCS 105/107.03)May or may not have “members” (805 ILCS 105/107.03) Need a minimum of 3 Directors (805 ILCS 105/108.10Need a minimum of 3 Directors (805 ILCS 105/108.10 Dissolution distributions must be made subject to either Dissolution distributions must be made subject to either

a requirement to return to the contributor or go to an a requirement to return to the contributor or go to an organization with a similar purpose or pursuant to a pre-organization with a similar purpose or pursuant to a pre-adopted plan (805 ILCS 105/112.16) adopted plan (805 ILCS 105/112.16)

2. NONPROFIT CORPORATIONS 2. NONPROFIT CORPORATIONS (continued)(continued)

Helpful reminders for Nonprofit Helpful reminders for Nonprofit CorporationsCorporations Nonprofit Corporations can make money, Nonprofit Corporations can make money,

pay bonuses to employeespay bonuses to employees Nonprofit Corporation does not mean a Nonprofit Corporation does not mean a

tax-exempt organization – tax exemption tax-exempt organization – tax exemption is an Internal Revenue Service issueis an Internal Revenue Service issue

Do have directors, bylaws and purpose Do have directors, bylaws and purpose well established and agreed upon prior to well established and agreed upon prior to forming the corporationforming the corporation

3. LIMITED LIABILITY 3. LIMITED LIABILITY COMPANIESCOMPANIES

Limited Liability Company Act – 805 ILCS 180/1.1 Limited Liability Company Act – 805 ILCS 180/1.1 et. et. seq.seq.

Requirements:Requirements: Name must contain the term “limited liability company”, Name must contain the term “limited liability company”,

“L.L.C.” or “LLC” (805 ILCS 180/1-10)“L.L.C.” or “LLC” (805 ILCS 180/1-10) MemberMember Indication if “member managed” or “manager managed” Indication if “member managed” or “manager managed”

on the Articles of Organization (805 ILCS 180 5/5)on the Articles of Organization (805 ILCS 180 5/5) No requirement for “corporate formalities” (805 ILCS No requirement for “corporate formalities” (805 ILCS

180/10-10(c))180/10-10(c)) No requirement for an “Operating” or “LLC” Agreement – No requirement for an “Operating” or “LLC” Agreement –

default to provisions in the act (805 ILCS 180 15-5) – default to provisions in the act (805 ILCS 180 15-5) – BUT BUT – – you should have a written agreement among the membersyou should have a written agreement among the members

LLC Agreement can modify LLC Agreement can modify anyany provision of the LLC Act, provision of the LLC Act, except as set forth in 805 ILCS 180/15-5except as set forth in 805 ILCS 180/15-5

3. LIMITED LIABILITY 3. LIMITED LIABILITY COMPANIES (continued)COMPANIES (continued)

Top issues to consider with an LLC Agreement:Top issues to consider with an LLC Agreement: Management and AuthorityManagement and Authority

Member managed or manager managedMember managed or manager managed If manager managed, manager must be a “person” (805 If manager managed, manager must be a “person” (805

ILCS 180/1-5) ILCS 180/1-5) A “person” is an individual, partnership, limited partnership, A “person” is an individual, partnership, limited partnership,

limited liability company, trust, estate, association, limited liability company, trust, estate, association, corporation or other judicial being – corporation or other judicial being – NOTNOT a “board” a “board”

In either member managed or manager managed In either member managed or manager managed companies, make clear how decisions are made (majority, companies, make clear how decisions are made (majority, supermajority, member approval and tie-breakers)supermajority, member approval and tie-breakers)

Note: Illinois requires on the Articles of Organization what Note: Illinois requires on the Articles of Organization what type of management the LLC has, and this trumps what an type of management the LLC has, and this trumps what an LLC Agreement may sayLLC Agreement may say

3. LIMITED LIABILITY 3. LIMITED LIABILITY COMPANIES (continued)COMPANIES (continued)

Top issues to consider with an LLC Top issues to consider with an LLC Agreement (continued):Agreement (continued):

Members, Allocations and DistributionsMembers, Allocations and Distributions Differentiate “Preferred Members” from Differentiate “Preferred Members” from

“Members”“Members” Remember to differentiate “tax allocations” from Remember to differentiate “tax allocations” from

“distributions” and review whether to have a “distributions” and review whether to have a mandatory tax distributionmandatory tax distribution

Don’t hesitate to use examples of distributionsDon’t hesitate to use examples of distributions Always add a tax savings clauseAlways add a tax savings clause AlwaysAlways review the allocations and distributions review the allocations and distributions

with the company accountantwith the company accountant

3. LIMITED LIABILITY 3. LIMITED LIABILITY COMPANIES (continued)COMPANIES (continued)

Top issues to consider with an LLC Top issues to consider with an LLC Agreement (continued):Agreement (continued): Termination & DissociationTermination & Dissociation

Review when, if ever, a member may Review when, if ever, a member may terminate or be terminatedterminate or be terminated

Review when, if ever, a member may leave or Review when, if ever, a member may leave or “dissociate” from the LLC (805 ILCS 180/35-“dissociate” from the LLC (805 ILCS 180/35-50)50)

Note: Illinois has a “put” right for members of Note: Illinois has a “put” right for members of a member managed LLC dissociating (805 a member managed LLC dissociating (805 ILCS 180/35-60(d)) – unless otherwise set ILCS 180/35-60(d)) – unless otherwise set forth in an LLC Agreementforth in an LLC Agreement

3. LIMITED LIABILITY 3. LIMITED LIABILITY COMPANIES (continued)COMPANIES (continued)

Top issues to consider with an LLC Top issues to consider with an LLC Agreement (continued):Agreement (continued): Fiduciary Duties and IndemnificationFiduciary Duties and Indemnification

Review fiduciary duties of a manager and Review fiduciary duties of a manager and membermember

Note: Illinois is Note: Illinois is notnot Delaware – cannot eliminate Delaware – cannot eliminate fiduciary duties of a managerfiduciary duties of a manager

Member managed LLC – members owe fiduciary Member managed LLC – members owe fiduciary duties to each other (805 ILCS 180/15-3) – duties to each other (805 ILCS 180/15-3) – including competition with the companyincluding competition with the company

Default provision is the LLC shall indemnify a Default provision is the LLC shall indemnify a member or manager (805 ILCS 180/15-7(a))member or manager (805 ILCS 180/15-7(a))

3. LIMITED LIABILITY 3. LIMITED LIABILITY COMPANIES (continued)COMPANIES (continued)

Top issues to consider with an LLC Top issues to consider with an LLC Agreement (continued):Agreement (continued): Information Rights (805 ILCS 108/1-40(b) and Information Rights (805 ILCS 108/1-40(b) and

10-15)10-15) 1-40(b) – Access to articles of organization, members, 1-40(b) – Access to articles of organization, members,

contributions, tax returns and LLC Agreementscontributions, tax returns and LLC Agreements 10-15 – Access to all LLC records10-15 – Access to all LLC records Note: Operating Agreement can NOT “unreasonably” Note: Operating Agreement can NOT “unreasonably”

restrict such access (805 ILCS 180 15/5(b)(1)) – but can restrict such access (805 ILCS 180 15/5(b)(1)) – but can include Confidentiality and Non-Disclosure requirementsinclude Confidentiality and Non-Disclosure requirements

Member is always entitled to a copy of the LLC Member is always entitled to a copy of the LLC Agreement (805 ILCS 180/10-15(b))Agreement (805 ILCS 180/10-15(b))

3. LIMITED LIABILITY 3. LIMITED LIABILITY COMPANIES (continued)COMPANIES (continued)

Non-standard Limited Liability CompaniesNon-standard Limited Liability Companies Series Limited Liability Companies (805 ILCS Series Limited Liability Companies (805 ILCS

180/37-40)180/37-40) Established in the LLC Agreement and filing of a Established in the LLC Agreement and filing of a

certificate of designationcertificate of designation Note: Illinois requires separate filing for each series to Note: Illinois requires separate filing for each series to

be establishedbe established Series can segregate assets and liabilitiesSeries can segregate assets and liabilities Each series can have different members and managersEach series can have different members and managers Each series can have its own “operating” agreementEach series can have its own “operating” agreement Under Illinois law, the series can consolidate their Under Illinois law, the series can consolidate their

operations as a single taxpayeroperations as a single taxpayer

3. LIMITED LIABILITY 3. LIMITED LIABILITY COMPANIES (continued)COMPANIES (continued)

Series Limited Liability Companies (805 Series Limited Liability Companies (805 ILCS 180/37-40) (continued)ILCS 180/37-40) (continued)

Issues with Series LLCsIssues with Series LLCs Unsure creditor/non-consolidation protection - while Unsure creditor/non-consolidation protection - while

Illinois states a series should be treated “as a Illinois states a series should be treated “as a separate entity” – no court decisions affirm this separate entity” – no court decisions affirm this positionposition

Pursuant to IRS ruling last year, cannot consolidate Pursuant to IRS ruling last year, cannot consolidate tax return unless all members of each series are tax return unless all members of each series are identical and own identical percentagesidentical and own identical percentages

Regulators are growing increasingly hostile to entitiesRegulators are growing increasingly hostile to entities Good luck (1) getting your client to follow proper Good luck (1) getting your client to follow proper

naming form and segregation for each series and (2) naming form and segregation for each series and (2) explaining what a series is to each person your client explaining what a series is to each person your client does business withdoes business with

3. LIMITED LIABILITY 3. LIMITED LIABILITY COMPANIES (continued)COMPANIES (continued)

Low-profit Limited Liability Company “L3C” Low-profit Limited Liability Company “L3C” (805 ILCS 180/1-26)(805 ILCS 180/1-26) Created for “Program Related Investments”, as Created for “Program Related Investments”, as

determined by the Internal Revenue Servicedetermined by the Internal Revenue Service Organized to (i) further one or more charitable Organized to (i) further one or more charitable

or educational purposes, (ii) no significant or educational purposes, (ii) no significant purpose is the production of income or capital purpose is the production of income or capital appreciation, and (iii) no purpose to accomplish appreciation, and (iii) no purpose to accomplish one or more political or legislative purposes.one or more political or legislative purposes.

Name must contain the term “L3C” (805 ILCS Name must contain the term “L3C” (805 ILCS 180/1-10)180/1-10)

3. LIMITED LIABILITY 3. LIMITED LIABILITY COMPANIES (continued)COMPANIES (continued)

Low-profit Limited Liability Company “L3C” Low-profit Limited Liability Company “L3C” (805 ILCS 180/1-26) (continued)(805 ILCS 180/1-26) (continued) Issues with L3CsIssues with L3Cs

Effort tied to corresponding Federal Legislation, the Effort tied to corresponding Federal Legislation, the Program-Related Investment Promotion Act of 2008 – Program-Related Investment Promotion Act of 2008 – but legislation never passedbut legislation never passed

No tax issues resolved by merely using an L3CNo tax issues resolved by merely using an L3C Unclear if anything accomplished by choosing an L3C Unclear if anything accomplished by choosing an L3C

that could not already be accomplished in an LLC that could not already be accomplished in an LLC AgreementAgreement

American Bar Association position is to not include American Bar Association position is to not include L3Cs in the model LLC ActL3Cs in the model LLC Act

4. PARTNERSHIPS4. PARTNERSHIPS Uniform Partnership Act (1997) – 805 Uniform Partnership Act (1997) – 805

ILCS 206/100 ILCS 206/100 et. seq.et. seq. Note: Includes “Limited Liability Note: Includes “Limited Liability

Partnerships” (805 ILCS 206/1001)Partnerships” (805 ILCS 206/1001) Uniform Limited Partnership Act Uniform Limited Partnership Act

(2001) – 805 ILCS 215/0.01 et. seq.(2001) – 805 ILCS 215/0.01 et. seq.

4. PARTNERSHIPS (continued)4. PARTNERSHIPS (continued) General PartnershipsGeneral Partnerships

The association of 2 or more persons to carry on The association of 2 or more persons to carry on a business for profit is a partnership, whether or a business for profit is a partnership, whether or not they intend to form or file a statement (805 not they intend to form or file a statement (805 ILCS 206/202(a))ILCS 206/202(a))

All partners are liable jointly and severally for all All partners are liable jointly and severally for all obligations of the partnership (805 ILCS 206/306) obligations of the partnership (805 ILCS 206/306)

Partners owe fiduciary duties to each other (805 Partners owe fiduciary duties to each other (805 ILCS 206/404)ILCS 206/404)

Partnership Agreement can modify any provision Partnership Agreement can modify any provision of the Partnership Act, except as set forth in 805 of the Partnership Act, except as set forth in 805 ILCS 206/103 ILCS 206/103

4. PARTNERSHIPS (continued)4. PARTNERSHIPS (continued) General Partnerships (continued)General Partnerships (continued)

Limited Liability Partnerships (805 ILCS Limited Liability Partnerships (805 ILCS 206/1001 206/1001 et. seqet. seq.).)

To elect, must file with the Secretary of State, and To elect, must file with the Secretary of State, and name must include “LLP”, “RLLP” languagename must include “LLP”, “RLLP” language

Any obligation or liability of the LLP incurred is solely Any obligation or liability of the LLP incurred is solely the obligation of the LLP, not the partners (805 ILCS the obligation of the LLP, not the partners (805 ILCS 206/306(c))206/306(c))

An LLP is a “general partnership” under the Act (805 An LLP is a “general partnership” under the Act (805 ILCS 206/201)ILCS 206/201)

Note: Certain regulatory authorities may not allow their Note: Certain regulatory authorities may not allow their regulated entities to be LLCs, just “corporations or regulated entities to be LLCs, just “corporations or partnerships”partnerships”

4. PARTNERSHIPS (continued)4. PARTNERSHIPS (continued) Limited PartnershipsLimited Partnerships

Certificate of Limited Partnership must be filed (805 ILCS Certificate of Limited Partnership must be filed (805 ILCS 215/201) 215/201)

Name must contain “limited partnership”, “L.P.” or “LP” Name must contain “limited partnership”, “L.P.” or “LP” (805 ILCS 215/108)(805 ILCS 215/108)

Must have a General Partner, who is liable for all Must have a General Partner, who is liable for all obligations of the LP (805 ILCS 215/404)obligations of the LP (805 ILCS 215/404)

Limited Partners are not liable for the obligations of the Limited Partners are not liable for the obligations of the LP (805 ILCS 215/303)LP (805 ILCS 215/303)

General Partner has exclusive authority for the LP (805 General Partner has exclusive authority for the LP (805 ILCS 215/406)ILCS 215/406)

Limited Partnership Agreement can modify any provision Limited Partnership Agreement can modify any provision of the Limited Partnership Act, except as set forth in 805 of the Limited Partnership Act, except as set forth in 805 ILCS 215/110ILCS 215/110

5. Associations5. Associations Professional Association Act – 805 Professional Association Act – 805

ILCS 305/0.01 ILCS 305/0.01 et. seq.et. seq. Co-Operative Act – 805 ILCS 310/1 Co-Operative Act – 805 ILCS 310/1

et. seq.et. seq. Agricultural Co-Operative Act – 805 Agricultural Co-Operative Act – 805

ILCS 315/1 ILCS 315/1 et. seq.et. seq. Cemetery Association Act – 805 ILCS Cemetery Association Act – 805 ILCS

320/0.01 320/0.01 et. seq.et. seq.

5. Associations (continued)5. Associations (continued) Association Issues, generallyAssociation Issues, generally

Very specialized entitiesVery specialized entities Distributions may be restricted, but are Distributions may be restricted, but are

allowedallowed Governance by a Board, selected by the Governance by a Board, selected by the

membersmembers Membership restricted to the common Membership restricted to the common

group (i.e. “professionals”, “agricultural group (i.e. “professionals”, “agricultural producers”, etc.)producers”, etc.)

EXHIBITSEXHIBITS 1. Form Illinois Articles of Incorporation1. Form Illinois Articles of Incorporation 2. Form Corporate Checklist2. Form Corporate Checklist 3. Form Bylaws3. Form Bylaws 4. Form Illinois Articles of Organization4. Form Illinois Articles of Organization 5. Form LLC Checklist5. Form LLC Checklist 6. Form Single Member, Manager 6. Form Single Member, Manager

Managed LLC AgreementManaged LLC Agreement

SPEAKER CONTACT SPEAKER CONTACT INFORMATIONINFORMATION

Sean AutonSean Auton500 West Madison Street500 West Madison StreetSuite 3700Suite 3700Chicago, Illinois 60661Chicago, Illinois 60661  voice: (312) 606-3226voice: (312) 606-3226fax: (312) 267-2229fax: (312) 267-2229cell: (312) 213-8915cell: (312) 213-8915e-mail: e-mail: sauton@hmblaw.comsauton@hmblaw.comwebsite: website: www.hmblaw.comwww.hmblaw.com