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This article will provide an overview of basic business entity laws types of business structures in Illinois and review what changes are in store for Illinois’ business in 2023.

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This article will provide an overview of basic business entity laws types of business structures in Illinois and review what changes are in store for Illinois’ business in 2023.  Read on to get insight on what business type may be right for you. Our Illinois business law attorneys will walk you through a variety of business models that will fit any of your legal issues.

What Laws Control Illinois Business?   

Determining the legal structure to open a new business depends on several factors, including liability, tax consequences, and how the business terminates. The Illinois business laws apply depending on the various type of business entities. This article will discuss the different business structures and how Illinois business law controls them.   

Business Law in Illinois

Sole Proprietorship

This is the simplest form of conducting business in Illinois. There are no formal requirements to establish the business, and it is simple to terminate the business.  

Legally, the sole proprietorship does not have a separate identity from the business owners. There are no formal documents that need to be filed with the Illinois Secretary of State. However, the business owner still must have the proper licensing and required documents. Suppose the owner chooses to use a name different from their legal name. In that case, the owner must register a business name under the Illinois Assumed Business Act. The owner must also report all business income or losses on the owner’s tax return.  

One concern with operating as a sole proprietorship is a liability. Since the business and the business owner are and the business is not separate legal entities, the owner is exposed to personal liability and liabilities of the business. Further, the owner’s assets are at risk if they are sued. It is highly recommended that sole proprietors obtain liability insurance because it will at the very least protect the owner’s assets from creditors.    

Sole proprietorships are a good business choice because they do not require many formalities. They are a suitable business entity for professionals such as doctors and lawyers. Selling the business to a new owner is simple. Termination of the business is also straightforward as the owner needs to cease his business.  

What about General Partnerships?

General partnerships are covered by Illinois Uniform Partnership Act (UPA). A general partnership is formed when two or more persons or legal entities associate to operate a business and share profits.    

A general partnership is a separate legal entity from the owners; however, the general partners are personally liable for the general partnership’s liabilities. A general partnership can be used in its name and also hold property in the general partnership’s name. General partnerships must file tax returns.  

General partnerships do require formal paperwork. This is called a partnership agreement, and it is a contract between the general partners. It must state-specific requirements, such as the operation of the general partnership.  

General partners owe a fiduciary duty of loyalty to the general partnership and may not compete with the general partnership.    

General partnership interests cannot transfer under the UPA; therefore, if the ability to freely transfer interests is vital to a business owner, this is not the best choice of business entity.  

Terminating the general partnership is also guided by the UPA. Such factors for dissolution of the general partnership include the expiration of the agreed duration of the partnership, completion of the project that the partnership was intended for, agreement by the partners, or if the partnership is engaging in unlawful acts.    

One of the disadvantages of a general partnership is unlimited liability. Each general partner has unlimited liability to the duties the general partnership owes. This also includes the acts of other general partners under an agency theory.  

General partnerships are helpful for joint ventures with corporations.  

Illinois General Partnerships

What is a Limited Partnership?

Limited partnerships are similar to general partnerships but have a limited partner. A limited partner functions like a shareholder in a corporation. The limited partner is passive other than investments and does not have any involvement in the operation of the limited partnership. The limited partner’s liability is restricted to the amount invested in the limited partnership. If a limited partner becomes involved with operating the business, they will no longer have the restricted liability. The Uniform Limited Partnership Act also governs a limited partnership by Illinois law.    

A limited partnership requires that there be at least one general partner. The general partner has unlimited liabilities for the limited partnership’s liabilities and actively participates in the operations of the limited partnership.    

The Illinois Secretary of State requires that a limited partnership file a certificate for the formation of the limited partnership.  

Limited Liability Partnership

A limited liability partnership will register with the Illinois Secretary of State and is known as a RLLP. Members of an RLLP can participate in the RLLP and maintain their limited liability status. In an RLLP, a partner cannot be held liable for the other partners’ negligence or transgressions. If the partner is personally negligent, the partner can be liable for their misconduct.    

RLLPs are also governed by a partnership agreement, as are other partnership business models in Illinois.  

An RLLP can lose its unique status if the partners vote by a majority to eliminate it or if the RLLP partners fail to renew the registration status annually with the Secretary of State.    

Typically, this form of business was popular with accounting firms. Still, changes in the Illinois Supreme Court rules in 2003 permitted Illinois law firms to utilize a RLLP.  

Forming a business in Ilinois


Corporations are separate legal entities from the owners. The corporation can be sued or sued in its name and can be a citizen for federal court jurisdiction purposes.  

Shareholders are the owners of a corporation. The corporate model allows owners to have limited liability, a centralized operation, interests that can be transferred without encumbrance, along tax considerations.    

A corporation can have several combinations of shareholders, including individuals, partnerships, other corporations, or any other type of legal entity. However, for tax purposes, if a corporation elects to be an “S Corp,” corporations or limited liability companies may not be a shareholder.    

Corporations are controlled by the state’s laws that they are incorporated within. The Illinois Business Corporation Act governs Illinois corporations. For a corporation to establish itself in Illinois, it must first file documents called “articles of incorporation “with the Secretary of State and pay the requisite fee. The articles of incorporation must be recorded with the local recorder where the corporation’s office for service of process is located. The Business Corporation Act also requires that the corporation must have written bylaws.  

Corporations are governed by a board of directors, which the shareholders elect. The board of directors has a fiduciary duty to the shareholders and the corporation to act in their best interests.  

Shareholders own shares in the corporation, and a stock certificate evidences their ownership. The type of stock issued by corporations can vary and is beyond the scope of this article. Our other article goes more in depth if you are interested in how to choose a corporation type in Illinois or the difference between types of corporations    

What are Illinois LLC Laws?

Limited Liability Companies (or “LLC”) are controlled by the Illinois Limited Liability Company Act (LLCA). The LLC structure is a separate legal entity from its shareholders. Since its passage, the LLCA was passed in 1994 and has become a popular business entity. This legal business entity has several features like a corporation with limited liability and federal tax benefits. Members have limited liability, a flexible management structure, and pass-through treatment for federal taxation purposes. Some limitations are the requirement by the Illinois Secretary of State requiring fees and annual filing requirements.  For additional information on which option is better for your company check out Should I Incorporate as an S-Corp or an LLC?

Here are some highlights on how LLCs work:

  • At least one or more members
  • Members have limited liability  
  • Cannot transfer management or membership rights  
  • The operating agreement controls how an LLC operates  
  • Unless members elect to continue with the operation of the LLC, it dissolves upon death, retirement, bankruptcy, resignation, or bankruptcy.    
  • The operating agreement can authorize to create a series of limited liability companies with separate managers, members, duties, property, and obligations.  
  • An LLC is either “member (owner) managed” or a manager-managed LLC.  
  • In a member-managed LLC, the members have the same rights in management and conduct of the LLC.  
  • In a manager-managed LLC, a manager must be designated by the members and hold the position until the members have elected a successor.    

This article provided an overview, not intended to be an exhaustive review, of Illinois Business Laws and any significant updates for 2023. If you have questions regarding a small or large business in Illinois, don’t hesitate to get in touch with one of our experienced Illinois business lawyers at 630-324-6666.

December 20, 2022
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