HOW TO FORM AN ILLINOIS BUSINESS ENTITY: OVERVIEW OF ENTITIES Sean Auton Horwood, Marcus & Berk Chartered Chicago Bar Association September 15, 2011
TYPES OF ENTITIES
Corporations
Nonprofit Corporations
General, Series and L3C
Partnerships
Charity, Education, Politics, Religion, and Social
Limited Liability Companies
General, Closely Held, Professional Services and Medical Corporations
General, Limited and Limited Liability
Associations
Co-Ops
1. CORPORATIONS
Illinois Business Corporation Act of 1983 – 805 ILCS 5/1.01 et. seq. Requirements
Shareholder Board of Directors (can be 1 Director)
Officers – As prescribed in the bylaws (805 ILCS 5/8.50)
other than a “Close Corporation” (805 ILCS 5/2A.45) Special Note: Board of Directors is the body of authority for a corporation
Typically President and Secretary (often “Treasurer” as well) Same person may hold multiple offices – if set forth in bylaws
Annual Meetings of Shareholders and Directors
Shareholders (805 ILCS 5/7.05) – by earlier of 6 months after end of the fiscal year or 15 months after the last meeting
Shareholders may act by written consent in lieu of annual meeting (805 ILCS 5/7.10)
Directors – typically concurrent with annual shareholder meeting to conduct company business
Special Note: Informal Action By Directors (“written consent”) – need right in the bylaws and unanimous consent (805 ILCS 5/8.45)
1. CORPORATIONS (continued)
Additional Items to Review
Indemnification of Directors, Officers and Employees (805 ILCS 5/8.75)
Option of the corporation Review making mandatory for directors and at the discretion of the Board for officers and employees
Shareholder/Voting Agreements/Trusts (805 ILCS 5/7.71, 5/7.65, 5/7.70)
Contractual tool to:
(i) restrict or require voting (ii) force a sale or purchase of shares (iii) confer special rights (not “preferred rights”) Compare to Limited Liability Company Agreements
“C” Corp. or “S” Corp. status is an Internal Revenue Service issue, not a state formation issue
1. CORPORATIONS (continued)
Specialty Corporations
Professional Service Corporations (805 ILCS 10/1, et. seq.) and Medical Corporation Act (805 ILCS 15/1, et. seq.) Shareholders/Directors must be licensed in the profession being practiced by the corporation (805 ILCS 10/3.4, 805 ILCS 15/13)
Corporate liability shield does not apply to professional liability of a shareholder (805 ILCS 10/8)
Note: Short time exemption for executor/spouse ownership
Note: Shareholder may not be liable for acts of another shareholder
Need to address buyout provisions for non-qualified shareholders or default to book value of corporation (805 ILCS 10/11, 805 ILCS 15/16)
2. NONPROFIT CORPORATIONS
General Not for Profit Act of 1996 - 805 ILCS 105/101.01
Key Differences from a For-profit:
et. seq.
Limited Purpose (805 ILCS 105/103.05) – including charitable, educational, political, religious or social purposes Shares and Dividends prohibited (805 ILCS 105/106.05) May or may not have “members” (805 ILCS 105/107.03) Need a minimum of 3 Directors (805 ILCS 105/108.10 Dissolution distributions must be made subject to either a requirement to return to the contributor or go to an organization with a similar purpose or pursuant to a pre-adopted plan (805 ILCS 105/112.16)
2. NONPROFIT CORPORATIONS (continued)
Helpful reminders for Nonprofit Corporations
Nonprofit Corporations can make money, pay bonuses to employees Nonprofit Corporation does not mean a taxexempt organization – tax exemption is an Internal Revenue Service issue Do have directors, bylaws and purpose well established and agreed upon prior to forming the corporation
3. LIMITED LIABILITY COMPANIES
Limited Liability Company Act – 805 ILCS 180/1.1 et.
Requirements:
seq.
Name must contain the term “limited liability company”, “L.L.C.” or “LLC” (805 ILCS 180/1-10) Member Indication if “member managed” or “manager managed” on the Articles of Organization (805 ILCS 180 5/5) No requirement for “corporate formalities” (805 ILCS 180/1010(c)) No requirement for an “Operating” or “LLC” Agreement – default to provisions in the act (805 ILCS 180 15-5) – BUT – you should have a written agreement among the members LLC Agreement can modify any provision of the LLC Act, except as set forth in 805 ILCS 180/15-5
3. LIMITED LIABILITY COMPANIES (continued)
Top issues to consider with an LLC Agreement:
Management and Authority
Member managed or manager managed If manager managed, manager must be a “person” (805 ILCS 180/1-5)
A “person” is an individual, partnership, limited partnership, limited liability company, trust, estate, association, corporation or other judicial being – NOT a “board”
In either member managed or manager managed companies, make clear how decisions are made (majority, supermajority, member approval and tie-breakers) Note: Illinois requires on the Articles of Organization what type of management the LLC has, and this trumps what an LLC Agreement may say
3. LIMITED LIABILITY COMPANIES (continued)
Top issues to consider with an LLC Agreement (continued):
Members, Allocations and Distributions
Differentiate “Preferred Members” from “Members” Remember to differentiate “tax allocations” from “distributions” and review whether to have a mandatory tax distribution Don’t hesitate to use examples of distributions Always add a tax savings clause Always review the allocations and distributions with the company accountant
3. LIMITED LIABILITY COMPANIES (continued)
Top issues to consider with an LLC Agreement (continued):
Termination & Dissociation Review when, if ever, a member may terminate or be terminated Review when, if ever, a member may leave or “dissociate” from the LLC (805 ILCS 180/35-50) Note: Illinois has a “put” right for members of a member managed LLC dissociating (805 ILCS 180/35-60(d)) – unless otherwise set forth in an LLC Agreement
3. LIMITED LIABILITY COMPANIES (continued)
Top issues to consider with an LLC Agreement (continued):
Fiduciary Duties and Indemnification Review fiduciary duties of a manager and member Note: Illinois is not Delaware – cannot eliminate fiduciary duties of a manager Member managed LLC – members owe fiduciary duties to each other (805 ILCS 180/15-3) – including competition with the company Default provision is the LLC shall indemnify a member or manager (805 ILCS 180/15-7(a))
3. LIMITED LIABILITY COMPANIES (continued)
Top issues to consider with an LLC Agreement (continued):
Information Rights (805 ILCS 108/1-40(b) and 1015)
1-40(b) – Access to articles of organization, members, contributions, tax returns and LLC Agreements 10-15 – Access to all LLC records Note: Operating Agreement can NOT “unreasonably” restrict such access (805 ILCS 180 15/5(b)(1)) – but can include Confidentiality and Non-Disclosure requirements Member is always entitled to a copy of the LLC Agreement (805 ILCS 180/10-15(b))
3. LIMITED LIABILITY COMPANIES (continued)
Non-standard Limited Liability Companies
Series Limited Liability Companies (805 ILCS 180/3740)
Established in the LLC Agreement and filing of a certificate of designation Note: Illinois requires separate filing for each series to be established Series can segregate assets and liabilities Each series can have different members and managers Each series can have its own “operating” agreement Under Illinois law, the series can consolidate their operations as a single taxpayer
3. LIMITED LIABILITY COMPANIES (continued)
Series Limited Liability Companies (805 ILCS 180/37-40) (continued)
Issues with Series LLCs
Unsure creditor/non-consolidation protection - while Illinois states a series should be treated “as a separate entity” – no court decisions affirm this position Pursuant to IRS ruling last year, cannot consolidate tax return unless all members of each series are identical and own identical percentages Regulators are growing increasingly hostile to entities Good luck (1) getting your client to follow proper naming form and segregation for each series and (2) explaining what a series is to each person your client does business with
3. LIMITED LIABILITY COMPANIES (continued)
Low-profit Limited Liability Company “L3C” (805 ILCS 180/1-26)
Created for “Program Related Investments”, as determined by the Internal Revenue Service Organized to (i) further one or more charitable or educational purposes, (ii) no significant purpose is the production of income or capital appreciation, and (iii) no purpose to accomplish one or more political or legislative purposes. Name must contain the term “L3C” (805 ILCS 180/110)
3. LIMITED LIABILITY COMPANIES (continued)
Low-profit Limited Liability Company “L3C” (805 ILCS 180/1-26) (continued)
Issues with L3Cs
Effort tied to corresponding Federal Legislation, the ProgramRelated Investment Promotion Act of 2008 – but legislation never passed No tax issues resolved by merely using an L3C Unclear if anything accomplished by choosing an L3C that could not already be accomplished in an LLC Agreement American Bar Association position is to not include L3Cs in the model LLC Act
4. PARTNERSHIPS
Uniform Partnership Act (1997) – 805 ILCS 206/100 et. seq.
Note: Includes “Limited Liability Partnerships” (805 ILCS 206/1001)
Uniform Limited Partnership Act (2001) – 805 ILCS 215/0.01 et. seq.
4. PARTNERSHIPS (continued)
General Partnerships
The association of 2 or more persons to carry on a business for profit is a partnership, whether or not they intend to form or file a statement (805 ILCS 206/202(a)) All partners are liable jointly and severally for all obligations of the partnership (805 ILCS 206/306) Partners owe fiduciary duties to each other (805 ILCS 206/404) Partnership Agreement can modify any provision of the Partnership Act, except as set forth in 805 ILCS 206/103
4. PARTNERSHIPS (continued)
General Partnerships (continued)
Limited Liability Partnerships (805 ILCS 206/1001 et. seq.)
To elect, must file with the Secretary of State, and name must include “LLP”, “RLLP” language Any obligation or liability of the LLP incurred is solely the obligation of the LLP, not the partners (805 ILCS 206/306(c)) An LLP is a “general partnership” under the Act (805 ILCS 206/201)
Note: Certain regulatory authorities may not allow their regulated entities to be LLCs, just “corporations or partnerships”
4. PARTNERSHIPS (continued)
Limited Partnerships
Certificate of Limited Partnership must be filed (805 ILCS 215/201) Name must contain “limited partnership”, “L.P.” or “LP” (805 ILCS 215/108) Must have a General Partner, who is liable for all obligations of the LP (805 ILCS 215/404) Limited Partners are not liable for the obligations of the LP (805 ILCS 215/303) General Partner has exclusive authority for the LP (805 ILCS 215/406) Limited Partnership Agreement can modify any provision of the Limited Partnership Act, except as set forth in 805 ILCS 215/110
5. Associations
Professional Association Act – 805 ILCS 305/0.01 et. seq. Co-Operative Act – 805 ILCS 310/1 et.
seq.
Agricultural Co-Operative Act – 805 ILCS 315/1 et. seq. Cemetery Association Act – 805 ILCS 320/0.01 et. seq.
5. Associations (continued)
Association Issues, generally
Very specialized entities Distributions may be restricted, but are allowed Governance by a Board, selected by the members Membership restricted to the common group (i.e. “professionals”, “agricultural producers”, etc.)
EXHIBITS
1. Form Illinois Articles of Incorporation 2. Form Corporate Checklist 3. Form Bylaws 4. Form Illinois Articles of Organization 5. Form LLC Checklist 6. Form Single Member, Manager Managed LLC Agreement
SPEAKER CONTACT INFORMATION Sean Auton 500 West Madison Street Suite 3700 Chicago, Illinois 60661 voice: (312) 606-3226 fax: (312) 267-2229 cell: (312) 213-8915 e-mail:
[email protected] website: www.hmblaw.com
