Starting an S corporation (S corp) in Illinois is easy, and electing an S corp tax designation could potentially save your business money in taxes. Our guide will walk you through the process of starting your Illinois S corporation and provide you with tips on maintaining your S corp.
Want to form an S corp elsewhere? Check out our other How to Start an S corp guides to learn more.
We recommend using a professional formation service like Tailor Brands to get your S corp up and running in no time.
Factors to Consider Before Starting an S Corp in Illinois
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation requirements and restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Requirements
The IRS requires that businesses that elect the S corp status:
- Have 100 shareholders or less
- Are domestic LLCs or corporations
- Issue only one class of stock
- Shareholders are U.S. citizens or permanent resident aliens
- Are owned by private individuals
Read our What is an S Corporation to learn more about S corps
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by an LLC or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a Illinois S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
How to Form an Illinois S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend not starting a corporation with the S corp tax status because the S corp negates all of the benefits of a corporation.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Illinois
Starting an Illinois LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Tailor Brands to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Articles of Organization
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Illinois.
Be sure to choose a name that complies with Illinois naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for an Illinois LLC:
- Your name must include the phrase “limited liability company,” or one of its abbreviations (LLC or L.L.C.). If it is classified as a “low-profit LLC,” it must contain "L3C."
- Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
- Your name cannot include any of the following terms: Corporation, Corp., Incorporated, Inc., Ltd., Co., Limited Partnership, and L.P.
- Your name must be the name under which your LLC conducts business unless you register for an assumed name.
- Your name cannot contain any word or phrase (e.g. trust, trustee, fiduciary) that indicates or implies that your LLC is in the business of a corporate fiduciary unless permitted by the Secretary of Financial and Professional Regulation. If the LLC is organized to accept or execute trusts, the name must contain the word “trust.”
- The name may not contain any word or phrase that is restricted by any other state statute (e.g., LLCs are not permitted to operate as banks or insurers in Illinois).
- Your name must be distinguishable from any existing business in the state. This includes Illinois reserved names.
You can also read the Illinois state statute about LLC naming guidelines for more information.
2. Is the name available in Illinois? You can use the business name search on the Illinois Secretary of State website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Find a Domain Now
Step 2: Choose Your Illinois Registered Agent
You must elect a registered agent for your Illinois LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Step 3: File the Illinois LLC Articles of Organization
The Illinois Articles of Organization is used to officially register an LLC.
OPTION 1: File Online With Cyberdrive Illinois
- OR -
OPTION 2: File Form LLC-5.5 by Mail
State Filing Cost: $150 online and $75 by mail, payable to the Secretary of State (Nonrefundable)
Department of Business Services
Limited Liability Division
501 S. Second St., Rm. 351
Springfield, IL 62746
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Illinois LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Illinois S corp for you, so you can focus on the things that matter most - growing you business.
Keep Your Illinois S Corp Compliant
After you’ve elected to have your LLC taxed as an S corporation, you need to follow state and local laws to ensure that your business remains in good standing with the state of Illinois. All Illinois S corporations will need to file an annual report and obtain a State Tax ID Number in order to pay Illinois state taxes.
Illinois S Corp Annual Report
Since your LLC is taxed as an S corporation, you will still need to file an LLC annual report with the Illinois Secretary of State. The annual report allows the state to track tax payments, and you can also update the state government with any changes to your business’s address or registered agent.
There is a filing fee, and the annual report is due each year before the first day of the month that you initially registered your LLC. For example, if your business was registered on July 10th of 2017, then your annual report is due every year before July 1st. Even if your business does not make a profit or undergo any changes, you are still required to file an annual report. Failing to file the annual report on time can result in a late filing penalty, and the state may dissolve your business.
Read our Illinois Annual Report guide for step-by-step instructions
Illinois S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Illinois S corp owners can expect to pay the following taxes:
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Illinois Income Taxes
Illinois has a flat income tax rate of 4.95%. This means that, unlike with federal income taxes, regardless of how much income you make, your state income tax rate will remain at 4.95%. Many states have a gradual income tax rate, and Illinois's tax rate of 4.95% falls squarely in the middle when compared to income taxation in other states.
Illinois State ID Tax Number
You will need to register your business with Illinois’s Department of Revenue to receive a State ID Tax Number and pay your taxes.
Illinois Personal Property Replacement Tax
Illinois S corporations must pay a 1.5% tax on their business’s net income to the Illinois Department of Revenue.
Visit Illinois’s General Assembly website to read more about the Illinois Personal Property Replacement Tax.
Illinois Sales and Use Tax
Illinois has a 6.25% state sales tax. Local jurisdictions may have an additional tax that is added to this, but local jurisdiction sales taxes are capped at 4.75%. State sales taxes may need to be paid multiple times throughout the year. Visit Illinois’s Department of Revenue website to learn more.
Additional State Taxes
Illinois’s Department of Revenue outlines numerous taxes specific to the state of Illinois that depend on your industry, number of employees, and location.
Business owners may be responsible for registering and paying the following taxes in Illinois:
- Charitable games tax
- Gas tax
- Liquor tax
- Electricity tax
- Hotel operation occupation tax
- Telecommunications tax
Check out Illinois’s Department of Revenue’s website for more information.
Illinois Local Taxes
Local jurisdictions may have additional rules governing businesses in the area. Whether your business is in Chicago, Aurora, or a smaller city, you may have local taxes and permits that apply to your business, and we recommend you familiarize yourself with any local laws affecting how your business operates.
Start an Illinois S Corp FAQ
What is an S corp?
An S corporation (S corp) is a tax designation for which an LLC or a corporation can apply.
Are taxes for LLCs and S corps the same?
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
What is a reasonable salary for an S corp?
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
What is a distribution?
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
Can I still use my DBA name if I elect to be an S corp?
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.