Filing fees and entity choice in Illinois

A couple of hundred dollars should not deter an entrepreneur from his or her desired entity choice.  But it often does.  A new venture typically does not have a revenue stream set up and business owners are eager to limit their cash out flow.  Illinois does not help matters with an odd filing fee structure that ends up steering business owners towards corporations rather than limited liability companies.

Business owners naturally gravitate towards the $175 (plus the filing fee at the county level) required for a corporation instead of paying $500 to set up an LLC.  But the oddities in Illinois’s filing fee structure do not end there.  The annual franchise tax for corporations is based on a percentage of paid in capital.  LLCs pay a flat fee of $250.  As a result businesses with heavy capital investments by their owners are better off (solely for franchise tax reasons) operating as an LLC.  Given the state’s fiscal condition, one would expect Illinois to modify the franchise tax for LLCs to capture currently lost revenue.

While franchise taxes can dictate the choice of entity, they should not be the sole deciding factor.  Business owners should consider other factors for entity choice including income tax issues, the desirability of charging order protections, ease of administering various entities, employment taxes for owners, etc.  These issues can easily trump the few hundred dollars paid to Illinois.

In an ideal world the filing fees for various legal entities would be harmonized so that business owners can look at more important business related issues in choosing their entity.  Similarly, when the legislature amends the Business Corporation Act one would hope that they coordinate the changes with similar provisions of the Limited Liability Company Act, the Limited Partnership Act, etc.  As will be discussed in another post, the legislature’s failure to do so often creates legal ambiguities.

The commentary, information, and analyses conveyed on this site by the authors do not constitute legal advice and shall not be construed as such. Entires may or may not be updated following the time of original posting. By using this site, you understand that the information contained is not provided for the purpose of rendering legal advice. Your use of this site does not create an attorney-client relationship.

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