All business people share the same issues, how to acquire more clients, service them and get paid, spending the least amount in expenses to maximize profit. We also all share some legal issues that most businesses are oblivious to. Knowing what is required of your business legally can eliminate an unnecessary area of risk to your business. With that in mind, we like to educate our clients and potential clients to legal issues that can affect their success or failure in business. Read below our Business 101 issues so that you will be more in control of your business. Then if you have any questions, please feel free to ask us about them.
The State of Illinois controls the organizations of businesses which operate in Illinois. There are a number of laws that govern business entities. They include the Business Corporation Act, The Limited Liability Company Act, the Partnership Act and Limited Partnership Act.
The decision to create a business entity is an important one. We will discuss your long and short term business goals with you. We will also inquire about your business experience generally and also in the field of your new business. After our initial meeting, we may recommend that you put together a business plan and we may also suggest, in some instances, that you give the business a short time period to see if you like the business before you spend money having us create a business entity for you. Every situation is individual.
When we make the decision that it would be prudent for you to have a business entity and because we do not know your personal assets and personal tax situation, we suggest that you talk to your accountant about what type of business entity would be best for you. That is decision is made by your accountant based on types of expenses to be incurred, pension and benefit issues, the other income that you will have besides your business and other issues. We suggest that you do not tell your accountant what type of entity you would like and ask if that is okay but rather what they recommend and why. Once that decision has been made, we will prepare and have you sign all necessary documents to create your business entity and will send you a copy of the document which created your entity once we receive it back from the Secretary of State. Keep this with your important business documents
State of Illinois Yearly Requirements
If your business is a corporation (C or S corp), or a limited liability company, you have an obligation yearly to pay “Franchise tax.” Franchise tax means a tax on the right to operate a business in the State of Illinois. Most states have a similar tax. In Illinois, Franchise tax is collected by means of an Annual Report that must be filed with the State of Illinois each year in the same month in which your business was formed. The Annual Report is sent by the Secretary of State’s Office to your registered agent (see more below on registered agents) for completing and filing. The fee differs per business but most companies pay a minimum of $100 per year fee and most limited liability companies pay a minimum of $250 per year. If the Annual Report is not filed, the business will be dissolved.
You are also required to have yearly meetings if you are a corporation or if you committed to do so for a limited liability company. Yearly meetings can be held by an actual meeting of the directors or shareholders or by the members or managers of a limited liability company. Instead of an actual meeting, a written document (consent) can be signed which elects officers, directors or managers or allows for voting on other business issues. For single member limited liability companies or single shareholder corporations, written consents are always used on a practical basis.
You should also be aware that certain business fields or industries are regulated. Make sure that you focus on whether a special license is required for your business. Licenses are generally state based and different states have different regulations. If you have moved your business from one state to another, do not assume that the same type of licensing scheme is in effect. Your business association should be able to help you with this information, you can contact local and state licensing offices or we can research the issue for you. You should also be aware that certain cities have business licenses which must be obtained. The City of Chicago has a business license requirement and has been enforcing this requirement by having agents walk buildings to see if each business has a license. Fines exist for non-compliant businesses. Generally, businesses operating out of a home are not exempt from the license requirement. Other cities also have requirements and it is important to check on the requirements and obtain application forms before committing oneself to a business lease. At times, signage and zoning issues affect the ability to obtain a license and you must be aware of these issues before executing a Lease.
Secretary of State
This is the governmental entity in Illinois which administers all business related statutes including the Business Corporation Act and the Limited Liability Company Act. Any correspondence which you receive from them is important and should be sent to us. If we act as your registered agent already, we will get the correspondence directly on your behalf. Once we receive something for you, we will contact you and describe the type of action that is necessary as a result of the correspondence.
We act as a registered agent for most of our clients. This means that all notices from the Secretary of State’s Office comes to us directly and then we advise you of what issues exist. On a practical basis, we understand the meaning of the types of notices sent and advise you. This is a far superior approach to that of some business owners, who act as their own registered agent, and who put notices from the Secretary of State in a pile of administrative work on their desks and then forget about them. This can lead to serious results including the dissolution of the business.
Piercing the Corporate Veil
You might have heard this phrase but not known what it means. When one or more individuals set up a new business or create a business entity for an existing business they do so to decrease personal liability for the business’ obligations. As discussed above, the decision to have a business entity versus operating a business informally, as a sole proprietorship, is made based on accounting, tax and legal liability issues. If your company’s operations could result in personal injury or property damage, then it is probably best to create an entity to protect the owner(s) personal assets, including their home and investments. Another situation to consider is whether the business could encounter large financial obligations under a Lease or other contract. In both events, having a company, limited partnership or limited liability company can help, but only if you handle things properly. What does that mean? It means being properly capitalized so that you are not endangering your creditors (work through with your accountant about what is proper capitalization for your company), abiding by corporate requirements (filing Annual Reports and having Corporate Meetings, when and where required) and treating the business as a separate entity. This latter requirement means having a separate business bank account for all business income and writing checks out of the business checking account and treating your business separate from all owners personal assets and bills. Also, you should never sign individually for anything that is a company obligation. With all of these things in mind, you will have a greater chance of keeping that corporate veil in full effect to protect your home and other personal assets.
Signing for Your Business
You created your business entity to keep your business liabilities separate from your personal assets. You can inadvertently commit yourself personally to a business expense obligation. This occurs when you contact a supplier, for instance, who then sends a contract in your name and not that of your business. You sign your name as requested. The problem is that you have signed personally for a corporate obligation and if your business has a problem, you will be personally liable. To avoid this risk, always insert your business’ full name on any contract and then sign your name, along with the capacity in which you are signing. That could be as President, Treasurer, Secretary, Member, Manager, Partner, etc. Make sure that you know who has the authority to bind the business and then you will understand how to sign. We can answer any questions you have on this.
Business Bank Account
It is important that you have a business account that you use to deposit all income. This should be a checking account so that you can pay all expenses from this account for easy tracking for your financials and your tax return. It is also prudent for most businesses to have a reserve bank account. This is usually a savings account, a CD or a money market account. This account can be very useful if your business is seasonal or has different months in which income is less than normal. You can cash flow much better with a reserve account to tide you over during low income months.
Business Annual Tax Return
Not all businesses have to file tax returns. Make sure that you understand if yours does or whether you report all business income and expenses on your personal tax return each year. Your accountant can best help you understand your tax and tax return obligations.
Capitalization For Your Business
This is a term that you will hear your attorney, accountant and friends talk about but what does it mean? It means the amount of money that you will need for the operation of your business, including all of your start up costs until revenue from the business supports the day to day operational expenses plus the money that will be paid out to the owners, whether by salary or draw. This money can come from the new owners personal funds or funds received from family, friends or other investors. It can also come from a bank loan. For book keeping purposes, capital is allocated toward the amount paid for shares or partnership or LLC membership interests or to owner loans. Why? Read below.
Generally, if shareholders, members or partners in a business loan money to the business from their own funds, when the funds are later available for repayment out of business earnings, no tax is paid on the repayment of these funds. Ask your accountant for more details.
Buying Your Shares or Membership Interest
Whenever you set up a business entity (versus a sole proprietorship) you must pay for your shares, membership or partnership ownership interest. The money you pay to the company for this purpose will reduce the total amount of capital needed. For most service companies and those companies, without excessive equipment costs, $1,000 is believed to be an appropriate amount to use for the price of your shares or interest. Again, this is a decision best left to your accountant.
Each business incurs expenses including rent, supplies, inventory costs, salaries, etc. These are called business expenses. You subtract your business expenses from the total amount of business income to calculate “Net Income,” a term that your accountant may refer to. Expenses can be pre-organization or operational expenses. We will describe these briefly below.
When you create a new business you will have one time legal fees, accounting fees, and charges for supplies, rent, wiring, computers, etc. These are early expenses and will either be paid out of your initial operating capital or out of income.
These are expenses related to the actual operation of the business. They are not one time expenses generally.
Federal Employee Number (FEIN)
This is referred to as the FEIN or EIN. It is the federal identification number for your business. The FEIN is similar in purpose to you own personal Social Security number. It is necessary on many documents and for most tax filings. We obtain this for our clients as part of creating your business.
Illinois Business Tax Number (IBT)
This is the tax identification number from the State of Illinois for your business. Again, it is like your Social Security number for your business. We obtain this when you set up a business, if necessary.
Subchapter S Election Form (Sub S election)
If your business is going to be a Subchapter S corporation, the IRS must be advised of this fact. The form which does this is called a Subchapter S election. This has a time sensitive filing date and so make sure that we or your accountants file the election.
Keeping Your Accountant in the Loop
Keep your accountant in the loop about your business. Your accountant can help you avoid serious business problems and can save you in taxes. Also, some businesses, which are licensed, need to provide tax returns to governmental entities and these documents are best prepared by your accountant.
We can talk about all or any of these issues when we meet with you.