By: Jamie Baker, CPA
Key Takeaways:
- Decide on a business structure, such as a sole proprietorship, partnership, corporation, or LLC, as it impacts taxation and financial management. Consult with an accountant or attorney for informed decision-making.
- Register your business with the state if opting for a formal structure and ensure your chosen business name is unique and legally compliant. This involves checking availability with the Illinois Secretary of State and potentially reserving the name.
- Depending on the business type and location, secure required permits and licenses, such as a business license, professional licenses, sales tax permit, and zoning permits. Additionally, register for taxes and consider opening a business bank account and setting up bookkeeping systems for financial management.
Understanding Entity Structure and Tax Ramifications Moves the Process Along
Starting a business in Illinois is much like starting a business in other locations, but it comes with some steps that are unique to Illinois and are key to getting up and running as quickly as possible.
Below is a guide to understanding and navigating the process, from planning your business to handling legal and tax requirements. This guide outlines the steps necessary to start a business in Illinois, ensuring you are well-prepared to launch your venture successfully.
Choose a Business Structure
Deciding on a structure for your business is a key factor that will impact your taxation and financial management, so it’s not a decision to be made lightly. Consulting with a trusted advisor – your accountant or attorney – before taking this step can help you parse through all the issues and make an informed choice.
There are a few legal structures a business can take in Illinois, which fit broadly into two categories: formal and informal businesses.
- Formal businesses are registered with the state and must follow state rules. They need to submit documents annually to stay in good standing.
- Informal businesses don’t need to register, and they’re less separate from the owner(s) of the business.
The structure you select will depend on your business needs—each type of legal entity offers different types of asset protection, tax liability, and other legal considerations.
Common business structures include:
- Sole Proprietorship: Simplest structure, owned by one person.
- Partnership: Owned by two or more people.
- Corporation: Separate legal entity, offering liability protection to owners.
- Limited Liability Company (LLC): Combines the benefits of a corporation and a partnership.
Register Your Business in Illinois
If you choose an informal business structure, like a sole proprietorship or general partnership, you don’t need to register your business with the state. But a formal business structure needs to be registered, which requires paperwork and a filing fee. In the table below, find the details and costs for registering each common type of business in Illinois.
Register Your Business Name
Your business name is your brand identity, so choose it carefully. Once you have decided on a name, you need to ensure it is available and not already in use. States have regulations and criteria for business names, so abiding by Illinois rules governing business names is a critical first step. Here’s what you need to know:
- Check the Illinois Secretary of State business entity search to make sure your chosen business name is unique and hasn’t been taken by another business.
- Make sure your chosen business name meets all the legal criteria for a business in Illinois. The requirements depend on the business structure (more on that below).
- Check the US Patent and Trademark Office to make sure no one else has trademarked your business name.
You can lock in your business name by either registering your business with the state or applying to reserve the name. The process is a little different depending on your business structure. If you plan to register an LLC, you’ll need to submit Form LLC-1.15 and a $25 filing fee to reserve your chosen name. If you plan to register a corporation, you can request a reservation for up to three names via an online form.
At this stage, you may also want to register a domain name and corresponding social media accounts, so you can keep your online presence consistent.
In some cases, you may also need to file an application for an assumed name (also known as a DBA or “doing business as”). You’ll have to do this if you plan on conducting business using any name other than the one you register with the state. You can register an assumed name with your local county clerk.
Obtain Necessary Permits and Licenses
Whether you need a business license depends on the type of business you’re starting and where you’re located. For example, the city of Chicago requires most LLCs to have a city business license, even if they conduct business entirely online.
Certain types of businesses will also need professional licenses, permits, or tax certificates, depending on state and local regulations. These cover areas like health and safety, environmental protection, building and construction, and professional services. To see if you need a business license, check the Registration, Licenses, and Permits section of the state’s website.
Common permits and licenses include:
- Business license: Required for most businesses.
- Professional licenses: Needed for certain professions such as medical practitioners, lawyers, and real estate agents.
- Sales tax permit: Required if you are selling goods and services that are subject to sales tax.
- Zoning permits: Ensure your business location complies with local zoning regulations.
Check with local city and county governments to determine what permits and licenses are required for your specific business.
Select a Registered Agent
All businesses in Illinois need a registered agent—an individual listed on the business’s statement of information who can accept tax and legal documents on its behalf.
Business owners in Illinois can act as their own registered agent, as long as they reside in the state. Otherwise, you can hire a professional registered agent service. There are many options, and prices depend on the length of engagement and the types of services you need. In general, services range from $50 to $200 per year.
Register for Taxes
All businesses in Illinois must register with the Illinois Department of Revenue to obtain a Business Tax Number, which allows you to collect and pay sales tax. You may also need to register for other state and federal taxes depending on your business structure and activities.
- Obtain a federal Employee Identification Number (EIN) from the IRS: Required in all states for hiring employees. Think of it as a Social Security number for your business. It’s fast, easy and free to get an EIN—just fill out Form SS-4 and submit it to the IRS.
- Sales tax registration: Register with the Illinois Department of Revenue.
- State income tax withholding registration: Register with the Illinois Department of Revenue
- Unemployment insurance: If you have employees, you need to register for unemployment insurance with the Illinois Department of Employment Security.
Open a Business Bank Account
Although it is not a legal requirement, separating your personal and business finances is crucial for managing your business efficiently. Open a business bank account to handle all business transactions. This also helps in maintaining accurate financial records and simplifies tax preparation.
Set Up Accounting and Bookkeeping Systems
Keeping accurate financial records is essential for any business. Set up a reliable accounting and bookkeeping system to track income, expenses, and other financial transactions. You can use accounting software or hire a professional accountant to manage your books.
Obtain Business Insurance
Depending on the type of business you own, you may be required to obtain certain types of insurance. For instance, in Illinois, if you have at least one employee, you’re required to provide workers’ compensation insurance.
But even if insurance is not legally required, it’s usually a good idea. If you offer professional services, for example, you may want to consider professional liability insurance to protect yourself and your business.
Common types of business insurance include:
- General Liability Insurance: Protects against claims of bodily injury or property damage.
- Professional Liability Insurance: Covers claims of negligence or mistakes in professional services.
- Workers’ Compensation Insurance: Required if you have employees, covering medical expenses and lost wages for work-related injuries.
Consult with an insurance agent to determine the types and amounts of coverage you need.
Hire Employees
If your business requires employees, follow these steps to ensure compliance with state and federal employment laws:
- Set up payroll: Establish a payroll system to pay employees and withhold taxes.
- Report new hires: Report newly hired employees to the Illinois New Hire Reporting Center.
- Comply with labor laws: Ensure you comply with federal and state labor laws, including minimum wage requirements, overtime rules and workplace safety regulations.
Employers in Illinois are required to pay and withhold a few different payroll taxes:
- State income taxes: withheld from employees’ pay
- Unemployment Insurance: paid for by the employer
Illinois has reciprocity agreements with several states, including Iowa, Kentucky, Michigan, and Wisconsin. This means that if an employee works in Illinois and lives in one of those states, their employer should withhold income taxes for the employee’s home state.
Stay on top of filing requirements and taxes
In Illinois, LLCs and corporations must submit an annual report to the Secretary of State’s office each year in order to stay in good standing. Annual reports are due by the end of the month prior to the anniversary of the month your business was registered. Filing fees for annual reports are:
- $75 for LLCs and for-profit corporations
- $10 for nonprofits
Businesses are also responsible for filing their state and federal tax returns. State taxes will vary depending on the type of business—you may need to pay sales tax, payroll tax, or other taxes in addition to income tax, depending on your business activities. Learn more at the Illinois Department of Revenue website.
Seek Professional Help
Consider consulting with professionals such as attorneys, accountants, and business advisors to ensure you are making informed decisions and staying compliant with all legal and regulatory requirements. Starting a business in Illinois requires careful planning and adherence to various legal and regulatory requirements. By following these steps and seeking professional advice when needed, you can successfully navigate the process and set your business on the path to success.
