Illinois business entities fall into four practical choices for most owners: a sole proprietorship, a general or limited partnership, a limited liability company, or a corporation. The right pick depends on how many owners you have, how much personal liability protection you need, and how you want the income taxed. Two recent shifts matter in 2026: Illinois has ended its corporate franchise tax, and the federal beneficial ownership reporting requirement no longer applies to companies formed in the United States.
The Four Entity Types, Compared
A sole proprietorship is the default when one person starts doing business without filing anything. There is no state formation step. You and the business are the same legal person, so every debt and every lawsuit lands on you personally.1Illinois Department of Commerce and Economic Opportunity. Step by Step Guide
A general partnership forms automatically when two or more people carry on a business together for profit. No state filing is needed, though a written partnership agreement covering profit shares, decision-making, and exits saves a lot of trouble later. Every general partner is personally liable for partnership debts. A limited partnership is a different animal: it has at least one general partner with full personal liability and one or more limited partners whose exposure is capped at what they invested. Limited partnerships must file formation documents with the Illinois Secretary of State.
A limited liability company is the most common choice for Illinois small businesses, and for good reason. It gives members the liability shield of a corporation while allowing the IRS tax treatment of a sole proprietorship, partnership, or corporation depending on how many members there are and what you elect. Members are generally not personally responsible for business debts.
A corporation is a separate legal person that issues stock. Shareholders elect a board, the board appoints officers, and shareholders are generally shielded from business debts. A C corporation pays its own income tax. An S corporation passes income through to shareholders, who report it on their personal returns, but you have to elect S status with the IRS and meet its requirements, including a cap on the number of shareholders.1Illinois Department of Commerce and Economic Opportunity. Step by Step Guide
Picking and Clearing a Business Name
The name has to be distinguishable from everything already on file with the Illinois Secretary of State, and you can run a search in the Secretary’s business database before you file. An LLC name must include “LLC,” “L.L.C.,” or “Limited Liability Company.” A corporate name must include a designator like “Corp.,” “Inc.,” or “Incorporated.”1Illinois Department of Commerce and Economic Opportunity. Step by Step Guide
If you plan to operate under any name other than your full legal name or the entity’s registered name, the Illinois Assumed Business Name Act requires you to register that name with the county clerk where you do business. This applies to sole proprietorships, general partnerships, and professional service corporations. Skip it and you’ll run into problems opening bank accounts and enforcing contracts.1Illinois Department of Commerce and Economic Opportunity. Step by Step Guide
Forming an LLC or Corporation
To form an LLC, file Articles of Organization with the Illinois Secretary of State. The filing fee is $150. A Series LLC, which lets you create segregated series of assets and liabilities under one umbrella, costs $400 to form.2Illinois Secretary of State. Limited Liability Company Publications and Forms To form a corporation, file Articles of Incorporation, also with a $150 filing fee. Illinois historically layered a franchise tax on top of incorporation, but no franchise tax is due for any period on or after January 1, 2026, so the effective cost of incorporating has come down.
Both LLCs and corporations have to designate a registered agent and registered office in Illinois when they file. The registered agent is the person or company authorized to receive legal documents and official correspondence for the business. Letting that lapse can lead to involuntary dissolution.3Illinois Secretary of State. Guide for Organizing Domestic Limited Liability Companies
Federal Employer Identification Number
Most Illinois businesses need an EIN from the IRS. You need one if you have employees, operate as a partnership or corporation, pay excise taxes, or administer certain retirement plans. The application is free and runs online at irs.gov in a single session, and the IRS issues the EIN immediately on approval. Form your entity with the state first, because the IRS application asks for your formation date and state. Applying before the state filing is complete can delay things.4Internal Revenue Service. Get an Employer Identification Number
How Illinois Taxes Each Entity
Illinois has a flat individual income tax of 4.95% on net income.5Illinois Department of Revenue. What’s New for 2025 Sole proprietorships, partnerships, and S corporations are pass-through entities, meaning the business pays no Illinois income tax at the entity level. The income flows to the owners, who report it on their personal returns at 4.95%.
C corporations pay Illinois income tax at 7% of net income, plus a personal property replacement tax of 2.5%. S corporations and partnerships don’t owe the 7% corporate income tax, but they do owe the replacement tax at a lower rate of 1.5%.6Illinois Department of Revenue. What Is the Tax Rate for Businesses, Trusts, and Estates New S corporation owners often miss this one and assume pass-through status means the entity pays nothing to the state. It doesn’t.
S corporations and partnerships can also elect to pay a pass-through entity tax of 4.95% on the entity’s net income. Each owner then gets a credit against their personal Illinois income tax equal to their share of what the entity paid. The election exists so owners can work around the $10,000 federal cap on state and local tax deductions: the entity-level payment counts as a business deduction instead of a personal state tax payment.7Illinois Department of Revenue. Subchapter S (Small Business) Corporation
On the franchise tax: Illinois used to charge corporations a franchise tax based on paid-in capital. As of January 1, 2026, no franchise tax payments are due, and the statutory provisions are set to be formally repealed on January 1, 2027.
Annual Reports and Staying in Good Standing
Every Illinois LLC and corporation has to file an annual report with the Secretary of State. For LLCs, the fee is $75.2Illinois Secretary of State. Limited Liability Company Publications and Forms The report covers the principal office address, registered agent name and address, and the names of current managers or officers. It’s due during the entity’s anniversary month, meaning the month your formation documents were originally filed.
Corporate annual reports are governed by Section 14.05 of the Business Corporation Act and must list the corporation’s name, registered office and agent, principal office address, names and addresses of directors and officers, and information about authorized and issued shares.8Justia Law. Illinois Code 805 ILCS 5 – Article 14 Reports
Miss the deadline and the consequences are real. For corporations, the penalty is 10% of any delinquent franchise tax (where applicable) plus 2% interest per month on unpaid amounts. Both LLCs and corporations risk administrative dissolution if the reports go unfiled long enough. A dissolved entity can be reinstated by filing all overdue reports and paying all outstanding fees and penalties. Once reinstated, the entity’s existence is treated as if it was never interrupted, which protects officers and directors from personal liability for debts incurred during the lapse.9Illinois General Assembly. Illinois Code 805 ILCS 5/16.05
Keeping the Liability Shield Intact
Forming an LLC or corporation separates your personal assets from business liabilities. If the business is sued or can’t pay its debts, creditors can reach company assets but generally can’t touch your home, personal accounts, or personal property. Sole proprietors and general partners get none of this.
The shield has limits. Illinois courts will pierce the veil and hold owners personally liable when two things are true. First, there is a unity of interest between the owner and the entity, with no real separation between them. The classic warning signs are mixing personal and business funds, failing to hold required meetings, and keeping poor financial records. Second, respecting the entity’s separate existence would produce an unjust result, such as when the entity was used to perpetrate a fraud.
Prevention is simple in theory. Keep a separate business bank account, maintain real records, hold and document any required meetings, and don’t treat business money as personal cash. These habits are easy to let slide in a one-person LLC, which is exactly the situation where neglecting them creates the most risk.
Beneficial Ownership Reporting
The Corporate Transparency Act originally required most small companies to report their beneficial owners to the Financial Crimes Enforcement Network. As of March 2025, FinCEN issued a rule exempting all entities formed in the United States from the reporting obligation. The requirement now applies only to entities formed under foreign law that have registered to do business in a U.S. state or tribal jurisdiction.10FinCEN. Beneficial Ownership Information Reporting
So if you form a standard Illinois LLC or corporation, you don’t currently need to file a beneficial ownership report with FinCEN. Rules can change, so it’s worth watching if you’re forming a new entity. Foreign-owned entities registering in Illinois still have a 30-day filing deadline after registration becomes effective.10FinCEN. Beneficial Ownership Information Reporting
Obligations That Kick In When You Hire
Once an entity has employees, several Illinois laws apply regardless of how the business is structured.
The Illinois Human Rights Act prohibits workplace discrimination based on race, religion, sex, age, marital status, disability, and other protected characteristics, and the Illinois Department of Human Rights investigates complaints.11Illinois Department of Human Rights. Welcome to the Department of Human Rights
The Wage Payment and Collection Act governs when, where, and how often employers must pay wages, and it prohibits deductions from wages or final compensation without the employee’s written consent. The Illinois Department of Labor can pursue collection on an employee’s behalf when employers violate it.12Illinois Department of Labor. Wage Payment and Collection Act The state minimum wage is $15.00 per hour for workers 18 and older. Tipped employees may be paid 60% of the minimum wage, and workers under 18 with fewer than 650 hours in a calendar year earn a minimum of $13.00 per hour.13Illinois Department of Labor. Minimum Wage Law
Illinois requires every employer with even one employee to carry workers’ compensation insurance. Sole proprietors, business partners, corporate officers, and LLC members may exempt themselves, but coverage is mandatory for anyone they hire. An employer that knowingly fails to obtain insurance faces fines of up to $500 per day with a minimum penalty of $10,000, and corporate officers can be held personally liable for the penalty. The Workers’ Compensation Commission can also issue a work-stop order and shut operations down until proof of insurance is produced.14Illinois Workers’ Compensation Commission. Insurance
The Illinois WARN Act requires employers with 75 or more full-time employees to give 60 days’ advance written notice before a mass layoff or plant closing. Notice goes to affected employees, the Department of Commerce and Economic Opportunity, and the chief elected official of each affected municipality and county.15Illinois Department of Labor. Worker Adjustment and Retraining Notification Act A separate federal WARN Act has its own thresholds and can apply on top of the state law.