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HOW TO FORM AN ILLINOIS BUSINESS ENTITY OVERVIEW OF ENTITIES.ppt

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					  HOW TO FORM AN ILLINOIS
BUSINESS ENTITY: OVERVIEW OF
          ENTITIES
               Sean Auton
     Horwood, Marcus & Berk Chartered
         Chicago Bar Association
           September 15, 2011
             TYPES OF ENTITIES
n   Corporations
    n   General, Closely Held, Professional Services and Medical Corporations
n   Nonprofit Corporations
    n   Charity, Education, Politics, Religion, and Social
n   Limited Liability Companies
    n   General, Series and L3C
n   Partnerships
    n   General, Limited and Limited Liability
n   Associations
    n   Co-Ops
                 1. CORPORATIONS
n   Illinois Business Corporation Act of 1983 – 805 ILCS 5/1.01 et. seq.
n   Requirements
     n   Shareholder
     n   Board of Directors (can be 1 Director)
          n   other than a “Close Corporation” (805 ILCS 5/2A.45)
          n   Special Note: Board of Directors is the body of authority for a corporation
     n   Officers – As prescribed in the bylaws (805 ILCS 5/8.50)
          n   Typically President and Secretary (often “Treasurer” as well)
          n   Same person may hold multiple offices – if set forth in bylaws
     n   Annual Meetings of Shareholders and Directors
          n   Shareholders (805 ILCS 5/7.05) – by earlier of 6 months after end of the
              fiscal year or 15 months after the last meeting
                n   Shareholders may act by written consent in lieu of annual meeting (805 ILCS
                    5/7.10)
          n   Directors – typically concurrent with annual shareholder meeting to conduct
              company business
                n   Special Note: Informal Action By Directors (“written consent”) – need right in the
                    bylaws and unanimous consent (805 ILCS 5/8.45)
    1. CORPORATIONS (continued)
n   Additional Items to Review
    n   Indemnification of Directors, Officers and Employees (805 ILCS
        5/8.75)
         n   Option of the corporation
         n   Review making mandatory for directors and at the discretion of the
             Board for officers and employees
    n   Shareholder/Voting Agreements/Trusts (805 ILCS 5/7.71,
        5/7.65, 5/7.70)
         n   Contractual tool to:
               n    (i) restrict or require voting
               n   (ii) force a sale or purchase of shares
               n   (iii) confer special rights (not “preferred rights”)
               n   Compare to Limited Liability Company Agreements
    n   “C” Corp. or “S” Corp. status is an Internal Revenue Service
        issue, not a state formation issue
     1. CORPORATIONS (continued)
n   Specialty Corporations
    n   Professional Service Corporations (805 ILCS 10/1, et. seq.) and
        Medical Corporation Act (805 ILCS 15/1, et. seq.)
    n   Shareholders/Directors must be licensed in the profession being
        practiced by the corporation (805 ILCS 10/3.4, 805 ILCS 15/13)
         n   Note: Short time exemption for executor/spouse ownership
    n   Corporate liability shield does not apply to professional liability of
        a shareholder (805 ILCS 10/8)
         n   Note: Shareholder may not be liable for acts of another shareholder
    n   Need to address buyout provisions for non-qualified
        shareholders or default to book value of corporation (805 ILCS
        10/11, 805 ILCS 15/16)
2. NONPROFIT CORPORATIONS
n   General Not for Profit Act of 1996 - 805 ILCS 105/101.01
    et. seq.
n   Key Differences from a For-profit:
    n   Limited Purpose (805 ILCS 105/103.05) – including charitable,
        educational, political, religious or social purposes
    n   Shares and Dividends prohibited (805 ILCS 105/106.05)
    n   May or may not have “members” (805 ILCS 105/107.03)
    n   Need a minimum of 3 Directors (805 ILCS 105/108.10
    n   Dissolution distributions must be made subject to either a
        requirement to return to the contributor or go to an organization
        with a similar purpose or pursuant to a pre-adopted plan (805
        ILCS 105/112.16)
2. NONPROFIT CORPORATIONS
         (continued)
n   Helpful reminders for Nonprofit
    Corporations
    n Nonprofit Corporations can make money, pay
      bonuses to employees
    n Nonprofit Corporation does not mean a tax-
      exempt organization – tax exemption is an
      Internal Revenue Service issue
    n Do have directors, bylaws and purpose well
      established and agreed upon prior to forming
      the corporation
              3. LIMITED LIABILITY
                   COMPANIES
n   Limited Liability Company Act – 805 ILCS 180/1.1 et.
    seq.
n   Requirements:
    n   Name must contain the term “limited liability company”, “L.L.C.”
        or “LLC” (805 ILCS 180/1-10)
    n   Member
    n   Indication if “member managed” or “manager managed” on the
        Articles of Organization (805 ILCS 180 5/5)
    n   No requirement for “corporate formalities” (805 ILCS 180/10-
        10(c))
    n   No requirement for an “Operating” or “LLC” Agreement – default
        to provisions in the act (805 ILCS 180 15-5) – BUT – you should
        have a written agreement among the members
    n   LLC Agreement can modify any provision of the LLC Act, except
        as set forth in 805 ILCS 180/15-5
              3. LIMITED LIABILITY
             COMPANIES (continued)
n   Top issues to consider with an LLC Agreement:
    n   Management and Authority
         n   Member managed or manager managed
         n   If manager managed, manager must be a “person” (805
             ILCS 180/1-5)
               n   A “person” is an individual, partnership, limited partnership,
                   limited liability company, trust, estate, association, corporation
                   or other judicial being – NOT a “board”
         n   In either member managed or manager managed
             companies, make clear how decisions are made (majority,
             supermajority, member approval and tie-breakers)
         n   Note: Illinois requires on the Articles of Organization what
             type of management the LLC has, and this trumps what an
             LLC Agreement may say
          3. LIMITED LIABILITY
         COMPANIES (continued)
n   Top issues to consider with an LLC Agreement
    (continued):
     n   Members, Allocations and Distributions
         n   Differentiate “Preferred Members” from “Members”
         n   Remember to differentiate “tax allocations” from
             “distributions” and review whether to have a mandatory
             tax distribution
         n   Don’t hesitate to use examples of distributions
         n   Always add a tax savings clause
         n   Always review the allocations and distributions with the
             company accountant
              3. LIMITED LIABILITY
             COMPANIES (continued)
n   Top issues to consider with an LLC
    Agreement (continued):
    n   Termination & Dissociation
         n Review when, if ever, a member may terminate or
           be terminated
         n Review when, if ever, a member may leave or
           “dissociate” from the LLC (805 ILCS 180/35-50)
         n Note: Illinois has a “put” right for members of a
           member managed LLC dissociating (805 ILCS
           180/35-60(d)) – unless otherwise set forth in an
           LLC Agreement
              3. LIMITED LIABILITY
             COMPANIES (continued)
n   Top issues to consider with an LLC
    Agreement (continued):
    n   Fiduciary Duties and Indemnification
         n Review fiduciary duties of a manager and member
         n Note: Illinois is not Delaware – cannot eliminate
           fiduciary duties of a manager
         n Member managed LLC – members owe fiduciary
           duties to each other (805 ILCS 180/15-3) –
           including competition with the company
         n Default provision is the LLC shall indemnify a
           member or manager (805 ILCS 180/15-7(a))
              3. LIMITED LIABILITY
             COMPANIES (continued)
n   Top issues to consider with an LLC Agreement
    (continued):
    n   Information Rights (805 ILCS 108/1-40(b) and 10-
        15)
         n   1-40(b) – Access to articles of organization, members,
             contributions, tax returns and LLC Agreements
         n   10-15 – Access to all LLC records
         n   Note: Operating Agreement can NOT “unreasonably” restrict
             such access (805 ILCS 180 15/5(b)(1)) – but can include
             Confidentiality and Non-Disclosure requirements
         n   Member is always entitled to a copy of the LLC Agreement
             (805 ILCS 180/10-15(b))
              3. LIMITED LIABILITY
             COMPANIES (continued)
n   Non-standard Limited Liability Companies
    n   Series Limited Liability Companies (805 ILCS 180/37-
        40)
         n   Established in the LLC Agreement and filing of a certificate of
             designation
         n   Note: Illinois requires separate filing for each series to be
             established
         n   Series can segregate assets and liabilities
         n   Each series can have different members and managers
         n   Each series can have its own “operating” agreement
         n   Under Illinois law, the series can consolidate their operations
             as a single taxpayer
          3. LIMITED LIABILITY
         COMPANIES (continued)
n   Series Limited Liability Companies (805 ILCS
    180/37-40) (continued)
     n   Issues with Series LLCs
          n   Unsure creditor/non-consolidation protection - while
              Illinois states a series should be treated “as a separate
              entity” – no court decisions affirm this position
          n   Pursuant to IRS ruling last year, cannot consolidate tax
              return unless all members of each series are identical
              and own identical percentages
          n   Regulators are growing increasingly hostile to entities
          n   Good luck (1) getting your client to follow proper naming
              form and segregation for each series and (2) explaining
              what a series is to each person your client does business
              with
            3. LIMITED LIABILITY
           COMPANIES (continued)
n   Low-profit Limited Liability Company “L3C” (805
    ILCS 180/1-26)
    n   Created for “Program Related Investments”, as
        determined by the Internal Revenue Service
    n   Organized to (i) further one or more charitable or
        educational purposes, (ii) no significant purpose is the
        production of income or capital appreciation, and (iii)
        no purpose to accomplish one or more political or
        legislative purposes.
    n   Name must contain the term “L3C” (805 ILCS 180/1-
        10)
              3. LIMITED LIABILITY
             COMPANIES (continued)
n   Low-profit Limited Liability Company “L3C” (805
    ILCS 180/1-26) (continued)
    n   Issues with L3Cs
         n   Effort tied to corresponding Federal Legislation, the Program-
             Related Investment Promotion Act of 2008 – but legislation
             never passed
         n   No tax issues resolved by merely using an L3C
         n   Unclear if anything accomplished by choosing an L3C that
             could not already be accomplished in an LLC Agreement
         n   American Bar Association position is to not include L3Cs in
             the model LLC Act
             4. PARTNERSHIPS
n   Uniform Partnership Act (1997) – 805 ILCS
    206/100 et. seq.
    n   Note: Includes “Limited Liability Partnerships”
        (805 ILCS 206/1001)
n   Uniform Limited Partnership Act (2001) –
    805 ILCS 215/0.01 et. seq.
4. PARTNERSHIPS (continued)
n   General Partnerships
    n   The association of 2 or more persons to carry on a
        business for profit is a partnership, whether or not
        they intend to form or file a statement (805 ILCS
        206/202(a))
    n   All partners are liable jointly and severally for all
        obligations of the partnership (805 ILCS 206/306)
    n   Partners owe fiduciary duties to each other (805 ILCS
        206/404)
    n   Partnership Agreement can modify any provision of
        the Partnership Act, except as set forth in 805 ILCS
        206/103
4. PARTNERSHIPS (continued)
n   General Partnerships (continued)
    n   Limited Liability Partnerships (805 ILCS 206/1001 et.
        seq.)
         n   To elect, must file with the Secretary of State, and name
             must include “LLP”, “RLLP” language
         n   Any obligation or liability of the LLP incurred is solely the
             obligation of the LLP, not the partners (805 ILCS 206/306(c))
         n   An LLP is a “general partnership” under the Act (805 ILCS
             206/201)
               n   Note: Certain regulatory authorities may not allow their
                   regulated entities to be LLCs, just “corporations or
                   partnerships”
4. PARTNERSHIPS (continued)
n   Limited Partnerships
    n   Certificate of Limited Partnership must be filed (805 ILCS
        215/201)
    n   Name must contain “limited partnership”, “L.P.” or “LP” (805
        ILCS 215/108)
    n   Must have a General Partner, who is liable for all obligations of
        the LP (805 ILCS 215/404)
    n   Limited Partners are not liable for the obligations of the LP (805
        ILCS 215/303)
    n   General Partner has exclusive authority for the LP (805 ILCS
        215/406)
    n   Limited Partnership Agreement can modify any provision of the
        Limited Partnership Act, except as set forth in 805 ILCS 215/110
             5. Associations
n   Professional Association Act – 805 ILCS
    305/0.01 et. seq.
n   Co-Operative Act – 805 ILCS 310/1 et.
    seq.
n   Agricultural Co-Operative Act – 805 ILCS
    315/1 et. seq.
n   Cemetery Association Act – 805 ILCS
    320/0.01 et. seq.
        5. Associations (continued)
n   Association Issues, generally
    n Very specialized entities
    n Distributions may be restricted, but are
      allowed
    n Governance by a Board, selected by the
      members
    n Membership restricted to the common group
      (i.e. “professionals”, “agricultural producers”,
      etc.)
                  EXHIBITS
n   1. Form Illinois Articles of Incorporation
n   2. Form Corporate Checklist
n   3. Form Bylaws
n   4. Form Illinois Articles of Organization
n   5. Form LLC Checklist
n   6. Form Single Member, Manager
    Managed LLC Agreement
       SPEAKER CONTACT
         INFORMATION
Sean Auton
500 West Madison Street
Suite 3700
Chicago, Illinois 60661
 
voice: (312) 606-3226
fax: (312) 267-2229
cell: (312) 213-8915
e-mail: sauton@hmblaw.com
website: www.hmblaw.com

				
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