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HOW TO FORM AN ILLINOIS BUSINESS ENTITY: OVERVIEW OF ENTITIES

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 General, Closely Held, Professional Services and Medical Corporations Nonprofit Corporations

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HOW TO FORM AN ILLINOIS BUSINESS ENTITY: OVERVIEW OF ENTITIES

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  1. HOW TO FORM AN ILLINOIS BUSINESS ENTITY: OVERVIEW OF ENTITIES Sean Auton Horwood, Marcus & Berk Chartered Chicago Bar Association September 15, 2011

  2. TYPES OF ENTITIES • Corporations • General, Closely Held, Professional Services and Medical Corporations • Nonprofit Corporations • Charity, Education, Politics, Religion, and Social • Limited Liability Companies • General, Series and L3C • Partnerships • General, Limited and Limited Liability • Associations • Co-Ops

  3. 1. CORPORATIONS • Illinois Business Corporation Act of 1983 – 805 ILCS 5/1.01 et. seq. • Requirements • Shareholder • Board of Directors (can be 1 Director) • other than a “Close Corporation” (805 ILCS 5/2A.45) • Special Note: Board of Directors is the body of authority for a corporation • Officers – As prescribed in the bylaws (805 ILCS 5/8.50) • 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)

  4. 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

  5. 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) • Note: Short time exemption for executor/spouse ownership • Corporate liability shield does not apply to professional liability of a shareholder (805 ILCS 10/8) • 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)

  6. 2. NONPROFIT CORPORATIONS • General Not for Profit Act of 1996 - 805 ILCS 105/101.01 et. seq. • Key Differences from a For-profit: • 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)

  7. 2. NONPROFIT CORPORATIONS (continued) • Helpful reminders for Nonprofit Corporations • Nonprofit Corporations can make money, pay bonuses to employees • Nonprofit Corporation does not mean a tax-exempt 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

  8. 3. LIMITED LIABILITY COMPANIES • Limited Liability Company Act – 805 ILCS 180/1.1 et. seq. • Requirements: • 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 180/10-10(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

  9. 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

  10. 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

  11. 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

  12. 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))

  13. 3. LIMITED LIABILITY COMPANIES (continued) • Top issues to consider with an LLC Agreement (continued): • Information Rights (805 ILCS 108/1-40(b) and 10-15) • 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))

  14. 3. LIMITED LIABILITY COMPANIES (continued) • Non-standard Limited Liability Companies • Series Limited Liability Companies (805 ILCS 180/37-40) • 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

  15. 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

  16. 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 180/1-10)

  17. 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 Program-Related 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

  18. 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.

  19. 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

  20. 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”

  21. 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

  22. 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.

  23. 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.)

  24. 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

  25. 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: sauton@hmblaw.com website: www.hmblaw.com

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