How to Start an S Corp in Illinois

Steps for Forming an LLC and Electing S Corp Status in Illinois

Starting a 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 Collective to do it for you.

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.

What is an S corp?

An S corporation (S corp) is a tax designation for which an LLC or a corporation can apply.

Is an S corp an LLC?

No. An S corp is a tax designation for which an LLC or a corporation can elect.

How do you form an S corp?

You can form an S corp by filing Form 2553 with the Internal Revenue Service (IRS).

What are the requirements for an S corp?

S corps must meet four requirements:

• They can have no more than 100 shareholders.
• All shareholders must be private individuals (not other business entities).
• Shareholders cannot be nonresident aliens.
• The business may only issue one class of stock-this means all members must have the same distribution amount.

What are the benefits of an S corp?

Owners of S corps are considered employees of their company and can save thousands of dollars on self-employment taxes as a result.

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.

Both LLCs and S corps benefit from a provision in the Tax Cuts and Jobs Act of 2017 that allows qualifying owners of pass-through entities to deduct 20% of qualified business income (QBI) from their tax returns. However, for S corps, the deduction doesn’t apply to profits paid out as wages.

What is a reasonable salary for an S corp?

Unlike the default LLC business structure, in which owners must pay self-employment tax on all of the company’s profits, owners of S corps are considered employees of the business and only have to pay self-employment tax on a salary they receive. Any other money they take from the company’s profits in the form of disbursements isn’t subject to self-employment tax.

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.

What is pass-through taxation?

Pass-through taxation is a system of taxation that generally applies to sole proprietorships, partnerships, LLCs, and S corps. In this system, the profits or losses of the business are not taxed at the business level. Instead, they pass through to the owners’ personal tax returns and are taxed at each owners’ personal income tax rate.

What is the S corp tax rate?

There’s no corporate tax rate for S corps. Instead, owners of S corps pay personal income tax on the company’s profits. This rate depends on each owner’s personal income tax bracket.

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.