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Editorial 6 MIN READ

Illinois in May 2017: the $500 LLC, and what the budget fight means for it

The highest formation fee in the country, a replacement tax most founders have never heard of, and a tax hike working its way through Springfield

The Editors
Staff, Incorporator.org
6 min read Updated
Contents 6 sections
  1. The mechanics
  2. Maintenance is where the bill lives
  3. The tax that founders miss
  4. Springfield, and what May looks like from the outside
  5. Who this state actually makes sense for
  6. Sources

n Illinois LLC costs $500 to form and $250 a year to keep. Those two numbers put Illinois at or near the top of every national comparison chart, tied with Massachusetts for the priciest entry in the country.

The question for someone forming this quarter is not whether Illinois is expensive — it is — but whether the reasons to form here anyway still hold, and whether the budget fight now grinding through Springfield is about to make a bad deal worse.

The mechanics

You file Articles of Organization (LLC Form 50.1) with the Secretary of State's Department of Business Services under 805 ILCS 180/5-5. The filing fee is $500, payable to the Secretary of State, and the form asks for the LLC's name, its principal place of business, the name and Illinois street address of a registered agent, the purpose (a single sentence is fine), the management structure, and the organizer's signature. Paper filings go to the Springfield office; online filings run through the Secretary of State's portal and typically clear within a few business days. Expedited service at the counter costs an extra $100.

Illinois permits the series LLC, and has since 2005, making it one of the earliest states to adopt the form. Articles of Organization for a series LLC under 805 ILCS 180/37-40 run $750 rather than $500. Each series can hold separate assets, have separate members, and — if the master operating agreement and the Articles meet the statutory requirements — enjoy a liability shield from the debts of any other series. This is useful for real-estate portfolios holding multiple properties. It is a complication not worth paying for if the business has one revenue stream.

After filing, the EIN comes from the IRS in the time it takes to fill out Form SS-4 online. Federal tax classification defaults apply — disregarded entity for a single member, partnership for multi-member — and most new LLCs let the default ride for the first year.

A $500 filing fee feels punitive because it is. The Illinois Secretary of State has not set these fees — the General Assembly did, in the statute itself — and they have not been adjusted since the current structure was put in place in the 1990s. Reform bills surface periodically and die in committee; another one is pending this session, but nothing has moved.

Maintenance is where the bill lives

Illinois requires an annual report for every LLC, due on the first day of the anniversary month of formation. A company formed May 15, 2017 owes its first annual report by May 1, 2018. The filing fee is $250. There is no discretion on the amount and no proration. The report asks only for current addresses and manager/member information; it is a twenty-minute task with a three-figure price tag.

Miss the deadline and Illinois adds a $300 penalty under 805 ILCS 180/50-1 — larger than the original fee. An LLC that ignores two consecutive annual reports is subject to administrative dissolution by the Secretary of State, and reinstatement adds its own filing fee on top of the arrears. The Secretary sends a postcard reminder to the registered agent. Founders who use a commercial agent receive it; founders who named themselves as agent at a home address and then moved typically do not.

The registered-agent market in Illinois is not the Delaware price war. Most of the recognized commercial providers charge $100–$200 a year, and the practical difference between them comes down to whether they will chase you about the annual report. For a first-time filer in Illinois, that is worth paying for. The math on one missed report — the $250 fee plus the $300 penalty plus the reinstatement cost if it drags — dwarfs any savings from a $50 mailbox.

The tax that founders miss

The line item founders consistently fail to anticipate is the Illinois Personal Property Replacement Tax. It is imposed by 35 ILCS 5/201(c) and (d) on business income as a replacement for the personal property tax the 1970 Illinois Constitution directed the state to abolish. Partnerships, trusts, and S corporations — which, for this purpose, includes an LLC taxed as a partnership or S-corp — pay 1.5% of net Illinois income. C-corporations pay 2.5%. These rates are on top of the income tax that flows through to the members.

A multi-member LLC running a consulting practice with $400,000 of net Illinois income owes $6,000 in replacement tax at the entity level before any member sees a K-1. The tax is computed on Form IL-1065, reported to the Illinois Department of Revenue, and paid by the 15th day of the fourth month following year-end.

Most new founders learn about the replacement tax when their accountant mentions it in the run-up to the first return. It is not exotic, but it does not appear on the Secretary of State's formation page, and plenty of out-of-state advice overlooks it entirely.

Springfield, and what May looks like from the outside

Illinois is now in the twenty-third month of its budget impasse. The Senate leadership's "Grand Bargain" — a package of revenue and reform bills including Senate Bill 9 — is the live vehicle. As introduced, SB 9 would raise the individual income tax rate from 3.75% to 4.95%, the corporate rate from 5.25% to 7%, and broaden the sales-tax base to a set of services not previously taxed. It would not, in its current form, change the replacement-tax rates or the LLC filing fees.

For a founder deciding this week, that means three things. The individual rate that will apply to flow-through income from a new Illinois LLC is 3.75% right now and plausibly 4.95% before year end, applied on a blended basis for calendar-year taxpayers. A C-corp electing here faces 5.25% now and 7% if SB 9 passes. And nothing in the current draft lowers the formation fee or the annual report cost that make Illinois the national outlier on entity maintenance.

Who this state actually makes sense for

Form in Illinois if the business lives in Illinois. Operational LLCs with Illinois customers, Illinois property, Illinois payroll, or Illinois licensing requirements should form here, pay the $500, and get on with it. The alternative — forming in Wyoming or Delaware and foreign-qualifying into Illinois — costs about the same in fees, adds a second registered agent and a second annual filing, and gets the owner no meaningful legal benefit, because the operating state's law governs the operation regardless.

Form elsewhere if the business is genuinely mobile. A remote SaaS consultancy with no Illinois nexus has no reason to pick Illinois. A holding company whose only purpose is to own intellectual property licensed to a Delaware operating company has no reason either. For those readers, Wyoming or Delaware still wins on cost and, in Delaware's case, on case law.

For the real-estate operator with an Illinois property portfolio, the series LLC at 805 ILCS 180/37-40 is the one place the Illinois statute is genuinely competitive with Delaware, Nevada, and Texas. The $750 filing fee buys a structure the Delaware Chancery Court has never directly passed judgment on and an Illinois statute that has been in force long enough to have been interpreted by Illinois courts on the points that matter. That is the argument for paying the Illinois premium when the business could live anywhere.

Everyone else should form here because they have to, not because they want to, and should watch the June 30 fiscal-year deadline in Springfield with some interest. The filing fee is not moving this session. The income tax rate probably is.

Sources

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