How to Start an S Corp in Illinois

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 Restrictions

S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.

Are S Corp Tax Advantages Right for You?

An S corporation is a tax designation that can be elected by a limited liability company (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 an 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.

To learn more about the tax advantages of an S corp, read our LLC vs. S corp guide and take a look at our S Corp tax calculator.

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.

Illinois S Corp Annual Report

Even though the IRS taxes your LLC as an S corp, you must still file an LLC annual report with the Illinois Secretary of State. This report allows the state to track tax payments and collect up-to-date information on any changes to your business’s address or registered agent. 

You must pay the filing fee and file your annual report before the first day of the month in which you initially registered your LLC. If you registered your business on July 10, 2017, for example, your annual report will be due before July 1 every year. Even if your business doesn’t make a profit or undergo any changes, you still need to file an annual report each year. Failure to file this report on time can result in a penalty and even the dissolution of your business by the state.

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 your state income tax rate will remain at 4.95% no matter how much income you earn in a given year. 

Many states have a graduated income tax rate that varies by an individual’s income bracket. Illinois’s 4.95% income tax rate falls squarely in the middle when compared to income taxes in other states.

Illinois State Tax ID Number

You’ll need to register your business with the Illinois Department of Revenue to receive a state tax ID number and pay your taxes. 

Illinois Personal Property Replacement Tax

Illinois S corps also must pay a 1.5% tax on their business’s net income to the Illinois Department of Revenue. Visit the Illinois 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 levy an additional tax on top of this, but the state caps local sales tax rates at 4.75%. Illinois businesses may need to pay state sales taxes at multiple times throughout the year. Visit the Illinois Department of Revenue website to learn more.

Additional State Taxes

The Illinois Department of Revenue outlines numerous other state-specific taxes your business may have to pay, depending on its industry, number of employees, and location. Some examples of these additional taxes include:

• Charitable Games Tax
• Electricity Excise Tax
• Gas Tax
• Hotel Operators’ Occupation Tax
• Liquor Gallonage Tax
• Telecommunications Tax

Visit the Illinois Department of Revenue website for more information.

Illinois Local Taxes

Local jurisdictions in Illinois may have additional rules governing businesses in the area. Whether your business operates in Chicago, Aurora, or a smaller city, local taxes and permits may apply to your business. Make sure you familiarize yourself with any local laws that can impact your business’s operations and tax obligations.