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The following is a brief summary of the common forms of business organizations. At the end of the chapter, issues that may affect all forms of business will be outlined, including registering an assumed name and obtaining tax identification numbers and licenses.
A sole proprietorship is relatively easy to organize. The business owner must acquire the appropriate licenses, if any, and tax identification numbers, and must register the business name. There are no specific state filing requirements for this business option.
The benefits of the sole proprietorship include having complete control over the business, ease of the initial set-up, and having business profits taxed at the individual taxpayer rate, which is lower than the rate charged to corporations.
The drawbacks to sole proprietorship include being personally responsible for debts and liabilities of the business. For example, if a business owner has debts that are not being paid, the creditors can reach the personal assets of the business owner, such as a personal checking account. A business owner may obtain insurance to minimize this drawback. Other drawbacks include lack of continuity--when the business owner dies, the business ceases to exist--and the fact that a sole proprietor is not able to deduct benefits like health, dental, and life insurance on his or her income tax return as business expenses.
General Partnership
A general partnership occurs when two or more persons own, manage, and control a business. Persons in a general partnership share the rights, duties, and responsibilities. Partnerships may also have employees; however, only the partners have control of the business activities.
A partnership has more issues to address than the sole proprietorship. Besides obtaining the appropriate licenses and tax numbers and registering the business name, partners must agree on the treatment of business profits, expenses, losses, and other business concerns.
Typically, there is a written agreement between the partners to address these issues. A general partnership in Illinois need not be registered with the state, and there are no formal requirements for its formation. However, state law governs the conduct, liabilities, and dissolution of a partnership, as well as the relationship between and liabilities of the partners. The benefits of a general partnership include the owners' control of the business. However, unlike the sole proprietor who has exclusive control, partners share control and responsibilities. Partners have the advantage of more than one resource for finances, ideas, and sharing the work load. The formation of a general partnership can be less complicated than other business formats, such as limited partnerships and corporations. Finally, profits from the partnership are included on the partners' individual tax returns and taxed at the individual taxpayer rate, which is lower than the rate charged to corporations.
The drawbacks to a general partnership include the partners' personal responsibility for the debts and liabilities of the partnership. A partner can be liable for debts incurred by other partners in furtherance of the business. As in a sole proprietorship, a partnership may obtain insurance to minimize this drawback. Business partners are treated like sole proprietors with regard to deducting benefits provided to themselves. Benefits like health, dental, and life insurance may generally not be deducted on partners' income tax returns as business expenses.
In a general partnership, the business generally dissolves upon the death, retirement or withdrawal of a partner, unless there is an express agreement to continue the business under such circumstances. If the business is continued, the former partner, or the former partner's legal representative, is entitled to the value of the former partner's interest, or the profits attributable to the use of the former partner's right in the property. By law, if a partnership interest is assigned to another person, that person is only entitled to the partner's profits from the business. That person may not participate in the management or operation of the partnership unless all the partners agree. These legal requirements may be modified by a partnership agreement. A partnership agreement may detail how a partnership interest may be sold, transferred, or handled upon the death of a partner. Addressing potential issues in an agreement may be one way to prevent disputes from occurring.
Limited Partnership
A limited partnership is similar in many respects to a general partnership. However, in a limited partnership, there are two types of partners--general and limited. Illinois law requires that a limited partnership have one or more general partners and one or more limited partners. The principal difference between a general and limited partner is that the limited partner can limit his or her personal liability for partnership debts to the amount he or she invests in the partnership. The limited partner, in exchange for the reduction in liability, does not control or manage the business. The general partner controls and manages the business and is personally liable for partnership debts.
Because limited partnerships must meet specific Illinois statutory requirements, they can be more complicated to establish. A limited partnership must apply for a certificate of limited partnership from the Secretary of State, and this certification must be renewed every two years. A limited partnership must maintain certain records, and must follow specific requirements for registering the business name. A limited partnership is not permitted to engage in the businesses of insurance, banking, or operating a railroad.
The benefits of a limited partnership depend on whether one is a general or limited partner. The general partner enjoys control and management responsibilities. The limited partner receives limited personal liability. Profits for both types of partners are included on the partners' individual tax returns and taxed at the individual taxpayer rate, which is lower than the rate charged to corporations.
The drawbacks of a limited partnership also depend on whether one is a general or limited partner. A general partner is personally responsible for the business debts while the limited partner is only liable for debts up to the amount he or she has invested in the partnership. The limited partner does not participate in the management or control of the business. Business partners are treated like sole proprietors with regard to deducting benefits provided to themselves. Benefits like health, dental, and life insurance may generally not be deducted on partners' income tax returns as business expenses.
Unlike a sole proprietorship or general partnership, when a limited partnership wishes to dissolve, it must file a certificate of cancellation with the Illinois Secretary of State in order to cancel its certificate of limited partnership. As mentioned previously, there are laws that apply to limited partnerships specifically that make this format more time-consuming and complex. A limited partnership can continue after the death or departure of a partner. The departing partner (or his or her beneficiaries) may be entitled to the fair market value of the partnership interest. The beneficiaries also may have the option of becoming limited partners. A partner's interest in a limited partnership may be assigned. However, the party receiving the assignment is only entitled to the profits that the assigning partner would have received. The partners may agree that the person receiving the assignment becomes a limited partner. This legal requirement may be modified by a partnership agreement. A partnership agreement may detail the conditions of how a partnership interest may be sold, transferred, or handled upon the departure or death of a partner.
Limited Liability Partnership
Since 1994, businesses in Illinois have had the option of filing as limited liability partnerships. A partner in a registered limited liability partnership is not liable for the debts or liabilities of the partnership arising from the negligence or wrongful acts of another partner, an employee, or agent of the partnership. However, each partner is always liable for that partner's own negligence or wrongful acts, and remains liable for the debts and liabilities of the partnership that arise from other causes, such as debts owed on business loans.
A limited liability partnership must register with the Illinois Secretary of State by filing an application and paying a fee. The registration must be renewed annually. There are also restrictions on the name such a partnership may use. In all other respects, the limited liability partnership is the same as a general partnership.
Corporations must be established in compliance with the requirements set forth in Illinois law. Shareholders are the owners of a corporation. Management and control of the corporation are the responsibility of the board of directors, who may or may not be the shareholders. Income, expenses, and losses of the business are filed on the corporation's tax returns.
There are many requirements for a business to become incorporated. A discussion of the incorporation requirements may be found in the Law & Leading Attorneys: Illinois Business Guide. The benefits of a corporation include protecting the shareholders from business debts and responsibilities in most cases. Unlike the business options previously discussed, a corporation's creditors may not seek to collect debts from the owners of the corporation. However, owners of a new corporation may be required by financial institutions to give personal financial assurances in order to receive funding. There is continuity of a corporate business regardless of individual shareholder status. Even if several shareholders sell their shares in a business or a principal stockholder dies, the existence of the corporation is not affected. Also, a corporation may sell stock or shares in its business to raise capital. Corporations may have several types of stocks or shares available, such as voting shares and nonvoting shares.
The drawbacks of a corporation include double taxation. The corporation files its own tax returns and pays taxes on its profits before paying dividends to the shareholders. When the shareholders receive the dividends, these profits are included on the individual shareholders' tax returns and taxed.
The requirements of an S corporation include:
Name Registration
Illinois law states that any business doing business in Illinois under a name other than the full name of the business owner must register the assumed name in the office of the county clerk of each county in which the company conducts business. A business owner must complete an application for a certificate of assumed name, and submit the proper fee. Notice of filing the certificate must be published in a newspaper in the county where application is made once a week for three consecutive weeks. After the owner submits proof of publication to the county clerk, the name is registered and is valid indefinitely without renewal. In Illinois, more than one business owner is permitted to operate under the same assumed name. Requirements for corporations and limited partnerships are different and can be found in the Law & Leading Attorneys: Illinois Business Guide.
Tax Identification Numbers
A business in Illinois must obtain a federal employer identification number. This identification number is the equivalent of a social security number for individuals. While sole proprietors without employees generally use their social security numbers, other businesses file Form SS-4 with the Internal Revenue Service.
A business with employees must also register with the Illinois Department of Labor for an unemployment compensation number.
A business that sells retail goods or services must obtain a retailer's occupation tax number. A business that sells at wholesale must obtain a resale certificate number. Both types of numbers are obtained through the Sales Tax Division of the Illinois Department of Revenue.
Licenses
A businesses operating in Illinois may also have to obtain federal, state, or local licenses. A businessperson must determine which licenses and permits are required before beginning his or her venture. A good place to start is the First Stop Business Information Center in Springfield, a comprehensive referral service that compiles permitting, licensing, and other regulatory requirements applicable to businesses.
Contact the Illinois Secretary of State, Department of Business Services, Howlett Building, Third Floor, Springfield, IL 62756, phone: (217) 782-6961 or 17 North State Street, Chicago, IL 60602, phone: (312) 793-3380 to order the free booklets, A Guide for Organizing Domestic Corporations and A Guide for Organizing Not-for-Profit Corporations.
Illinois Department of Revenue, 101 West Jefferson, Springfield, IL 62708, toll-free: (800) 732-8866; or 100 West Randolph, Chicago, IL 60601, phone: (312) 814-5258.
Illinois Department of Labor, Division of Unemployment Insurance, 910 South Michigan Avenue, 11th floor, Chicago, IL 60605, toll-free: (800) 247-4984. Call for the free packet, New Employer's Packet.
Internal Revenue Service, Forms Services, 230 South Dearborn, Chicago, IL 60609, toll-free: (800) 829-3676.
Service Corps of Retired Executives (SCORE), 500 West Madison Street, #1250, Chicago, IL 60661, phone: (312) 353-7724.
Small Business Development Center, 620 Adams Street East, Springfield, IL 62701, phone: (217) 785-6310.
Small Business AssistanceSpringfield, 511 West Capitol Avenue, Springfield, IL 62701, phone: (217) 492-4416.
Small Business AssistanceChicago, 500 West Madison, #1250, Chicago, IL, phone: (312) 353-4528.
How to Form a Nonprofit Corporation by Volunteer Lawyers for the Arts is available from Nolo Press by sending $39.95 plus $5.00 shipping and handling to VLA, Publications, One 53rd Street East, New York, NY 10022.
The Partnership Book: How to Write a Partnership Agreement by Volunteer Lawyers for the Arts is available from Nolo Press by sending $24.95 plus $4.00 shipping and handling to VLA, Publications, One 53rd Street East, New York, NY 10022.
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