ELEMENTS OF ILLINOIS LAW: ORGANIZING AND ADVISING A

2023 EDITION

ELEMENTS OF ILLINOIS LAW:

ORGANIZING AND ADVISING

A SMALL BUSINESS

TODD M. YOUNG

CONNIE M. MAYER

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ELEMENTS OF ILLINOIS LAW: ORGANIZING AND ADVISING A

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ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION v

ELEMENTS OF ILLINOIS LAW:

ORGANIZING AND ADVISING

A SMALL BUSINESS

2023 Edition

Authors:

Todd M. Young

Connie M. Mayer

ILLINOIS INSTITUTE FOR

CONTINUING LEGAL EDUCATION

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ELEMENTS OF ILLINOIS LAW: ORGANIZING AND ADVISING A SMALL BUSINESS

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23ELEMENTOA:9-23()ML

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TABLE OF CONTENTS

LLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION vii

Table of Contents

About the Authors ......................................................................... ix

1. Organizing and Advising a Small Business .......................... 1 — 1

Todd M. Young

Connie M. Mayer

ELEMENTS OF ILLINOIS LAW: ORGANIZING AND ADVISING A SMALL BUSINESS

viii

WWW.IICLE.COM

ABOUT THE AUTHORS

LLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION ix

About the Authors

Todd M. Young is a Partner with Hinshaw & Culbertson LLP, in Chicago,

where he concentrates his practice in corporate transactions, finance, and

ESOP transactions. He has been recognized as a “Notable LGBTQ

Executive” by Crain’s Chicago Business (2018) and holds the AV

Peer

Review Rating from Martindale-Hubbell, its highest rating for ethics and

legal ability. Young earned his A.B. cum laude from Dartmouth College

and his J.D. from the University of Chicago Law School, where he was

the Comment Editor for the University of Chicago Law Review.

Connie M. Mayer is a Partner with Hinshaw & Culbertson LLP, in Chicago,

where she focuses her practice on commercial transactions. She is a

member of the Illinois Chapter of the ESOP Association and has been

recognized by Illinois Super Lawyers as a Rising Star (2021 – 2023).

Mayer earned her B.A. cum laude from Illinois Wesleyan University and

her J.D. from Washington University School of Law.

ELEMENTS OF ILLINOIS LAW: ORGANIZING AND ADVISING A SMALL BUSINESS

WWW.IICLE.COM

BOARD OF DIRECTORS

LLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION xi

IICLE

Board of Directors

Chair

Bradley L. Cohn, Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP, Chicago*

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Hon. Ronald D. Spears, Spears Dispute Resolution, Taylorville*

Treasurer

Hal R. Morris, Saul Ewing Arnstein & Lehr LLP, Chicago*

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Stacy E. Singer, Northern Trust, Chicago*

Immediate Past Chair

LaVon M. Johns, Quintairos, Prieto, Wood & Boyer, P.A., Chicago*

Aurora Austriaco, Valentine Austriaco & Bueschel, P.C., Chicago

Gunnar J. Gitlin, The Gitlin Law Firm, Woodstock

Mitchell B. Gordon, Bradford & Gordon LLC, Chicago

Thomas G. Hamill, Harrison & Held, LLP, Springfield

Ray J. Koenig III, Clark Hill PLC, Chicago

Richard L. Miller II, CTM Legal Group, Chicago

Ava George Stewart, Law Office of Ava George Stewart, P.C., Chicago

Julie A. Tappendorf, Ancel Glink, Chicago

Upneet S. Teji, Greensfelder, Hemker & Gale, P.C., Chicago*

Heather E. Voorn, Voorn, Jaworski, & Preston, PLLC, New Lenox

Sonni Choi Williams, City of Lockport, Lockport

*Executive Committee Members

IICLE

Board of Directors Past Chairs

John S. Pennell (1969 – 1971)

H. Ogden Brainard (1962 – 1969)

John S. Pennell (1969 – 1971)

William K. Stevens (1971 – 1972)

J. Gordon Henry (1972 – 1973)

Roger J. Fruin (1973 – 1974)

Joseph J. Strasburger (1974 – 1975)

William J. Voelker (1975 – 1976)

Harold W. Sullivan (1976 – 1977)

John J. Vassen (1977 – 1978)

James M. (Mack) Trapp (1978 – 1979)

Theodore A. Pasquesi (1979 – 1980)

George W. Overton (1980 – 1981)

Peter H. Lousberg (1981 – 1982)

Kenneth C. Prince (1982 – 1983)

Edward J. Kionka (1983 – 1984)

Joseph L. Stone (1984 – 1985)

Thomas S. Johnson (1985 – 1986)

Richard William Austin (1986 – 1987)

Ralph T. Turner (1994 – 1995)

J. William Elwin, Jr. (1987 – 1988)

Donald E. Weihl (1988 – 1989)

Tomas M. Russell (1989 – 1990)

John K. Notz, Jr. (1990 – 1991)

Michael J. Rooney (1991 – 1992)

Willis R. Tribler (1992 – 1993)

Thomas Y. Mandler (1993 – 1994)

Ralph T. Turner (1994 – 1995)

Robert E. Bouma (1995 – 1996)

Patrick B. Mathis (1996 – 1997)

Michael H. Postilion (1997 – 1998)

Robert V. Dewey, Jr. (1998 – 1999)

Roma Jones Stewart (1999 – 2000)

Hon. John A. Gorman (2000 – 2001)

Michael L. Weissman (2001 – 2002)

George W. Howard III (2002 – 2003)

Robert E. Hamilton (2003 – 2004)

Patricia A. Hoke (2004 – 2005)

Thomas M. Hamilton, Jr. (2005 – 2006)

Hon. Dale A. Cini (2006 – 2007)

Susan T. Bart (2007 – 2008)

Adrianne C. Mazura (2008 – 2009)

George F. Mahoney, III (2009 – 2010)

Robert G. Markoff (2010 – 2011)

Hon. Leonard Murray (2011 – 2012)

Donald P. Seberger (2012 – 2013)

Lorraine K. Cavataio (2013 – 2014)

William J. Anaya (2015)

Thomas A. Lilien (2016)

Robert Z. Slaughter (2017)

Ben Neiburger (2018)

Paul E. Bateman (2019)

Jane N. Denes (2020)

James M. Lestikow (2021)

LaVon M. Johns (2022)

STAFF ELEMENTS OF ILLINOIS LAW: ORGANIZING AND ADVISING A SMALL BUSINESS

xii

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. 1 — 1

Organizing and

Advising a Small

Business

TODD M. YOUNG

CONNIE M. MAYER

Hinshaw & Culbertson LLP

Chicago

ELEMENTS OF ILLINOIS LAW: ORGANIZING AND ADVISING A SMALL BUSINESS

1 — 2

WWW.IICLE.COM

I. [1.1] Introduction

II. [1.2] Whom Do You Represent?

III. Choosing the Form of Business Entity

A. [1.3] Sole Proprietorship

B. Partnership

1. [1.4] General Partnership

2. [1.5] Limited Partnership

3. [1.6] Limited Liability Partnership and Limited Liability

Limited Partnership

C. Corporation

1. [1.7] C Corporation

2. [1.8] S Corporation

3. [1.9] Professional Corporation and Benefit Corporation

4. [1.10] Limited Liability Company and Professional Limited

Liability Company

5. [1.11] Close Corporation

D. [1.12] Joint Venture

E. [1.13] Cooperatives

F. General Considerations

1. [1.14] Number and Identity of Owners and Investors

2. [1.15] Limited Liability

3. [1.16] Tax Considerations

4. [1.17] Management

5. [1.18] Transferability of Ownership

6. [1.19] Estate Planning

7. [1.20] Professional Regulation

8. [1.21] Continuity of Ownership and Management

9. [1.22] Costs; Flexibility for Future Transactions

ORGANIZING AND ADVISING A SMALL BUSINESS

LLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 1 — 3

IV. Organizing the Business Entity

A. [1.23] Sole Proprietorship

B. Partnership

1. [1.24] General Partnership

2. [1.25] Limited Partnership

3. [1.26] Limited Liability Partnership and Limited Liability

Limited Partnership

C. C Corporation

1. [1.27] Selecting the State of Incorporation

2. [1.28] Incorporators

3. [1.29] Subscriptions for Shares; Pre-Organization

Subscriptions

4. [1.30] Articles of Incorporation

a. [1.31] Registered Agent and Office

b. [1.32] Purposes for Which Corporation Is Organized

c. [1.33] Authorized and Issued Shares; Consideration

Received

d. [1.34] Directors

e. [1.35] Allocation Factor

5. [1.36] Effectiveness of Articles of Incorporation

6. [1.37] Bylaws

7. [1.38] Meeting of Incorporators

8. [1.39] First Meeting of Shareholders

9. [1.40] First Meeting of Directors; Corporate Seal

10. [1.41] Form of Stock Certificate

D. [1.42] Organizing Other Forms of Corporations

1. [1.43] S Corporation

2. [1.44] Close Corporation

3. [1.45] Professional Corporation

ELEMENTS OF ILLINOIS LAW: ORGANIZING AND ADVISING A SMALL BUSINESS

1 — 4

WWW.IICLE.COM

E. [1.46] Limited Liability Company and Professional Limited

Liability Company

F. [1.47] Federal Employer Identification Number

G. [1.48] Trademarks, Trade Names, and Service Marks

V. [1.49] Buy-Sell Agreements

A. [1.50] Scope of Restriction on Transfer

B. [1.51] Price

C. [1.52] Triggering Events

D. [1.53] Purchaser

E. [1.54] Financing the Purchase

VI. [1.55] Securities Law Concerns

A. [1.56] Federal Securities Law

1. [1.57] Intrastate Offering Exemption

2. [1.58] Private Offering Exemption

3. [1.59] Violations of Federal Securities Law

B. [1.60] Illinois Securities Law

1. [1.61] Preincorporation Subscriptions

2. [1.62] Sales to Fewer than 35 Persons or Offerings Less

than $1 Million

3. [1.63] Sales to Existing Security Holders

4. [1.64] Miscellaneous

5. [1.65] Violations of Illinois Securities Law of 1953

ORGANIZING AND ADVISING A SMALL BUSINESS

LLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 1 — 5

VII. Capitalization and Financing of Corporations

A. [1.66] Equity and Debt

1. [1.67] Unconditional Promise To Pay

2. [1.68] Subordination or Preference

3. [1.69] Ratio of Debt to Equity

4. [1.70] Conversion of Debt into Stock

5. [1.71] Ownership of Debt and Equity

B. [1.72] 26 U.S.C. §1244

C. Outside Sources of Financing

1. [1.73] Banks

2. [1.74] Finance Companies

3. [1.75] Venture Capital Groups

4. [1.76] Leasing

5. [1.77] Governmental Agencies

VIII. [1.78] Operating the Business Entity

IX. [1.79] Appendix — Sample Forms

A. [1.80] Partnership Agreement

B. [1.81] Pre-Organization Subscription Agreement

C. [1.82] Bylaws

D. [1.83] Call and Waiver of Notice of First Meeting of

Shareholders (with Minutes of First Meeting of

Shareholders)

E. [1.84] Directors’ Action Pursuant to §8.45 of the Business

Corporation Act of 1983, as Amended

§1.1 ELEMENTS OF ILLINOIS LAW: ORGANIZING AND ADVISING A SMALL BUSINESS

1 — 6

WWW.IICLE.COM

I. [1.1] INTRODUCTION

Advising entrepreneurs and small business owners on the formation and

operation of their business ventures can be an exciting and challenging job for

the corporate attorney. The task involves giving advice on numerous legal

issues and fitting these legal issues into a framework of business concerns

unique to each client.

This handbook guides the practitioner through the basic legal issues that

should be discussed with a client seeking to organize a business entity.

Because this discussion is focused on small businesses, the handbook does not

delve extensively into issues concerning corporate securities problems and

methods of combining business entities (such as merger and acquisition

transactions). These topics are more likely to be considered in connection with

the representation of larger or more established business entities. Sections

1.80 – 1.84 below contain sample forms of basic agreements and documents

needed to create and work with some of the entities discussed. Current

versions of the federal, state, and county forms discussed in this handbook

may be found most effectively and reliably online at the websites indicated

throughout the handbook. Practitioners are encouraged to take advantage of

these online resources since forms are updated often and paper copies kept in

the office can become out of date easily.

II. [1.2] WHOM DO YOU REPRESENT?

When first consulting with a client wishing to create a new business

entity, counsel should clarify the identity of the client. Although multiple

individual owners may make the initial request that the lawyer help form the

entity, in many cases the lawyer effectively will end up representing the entity

as a client, both in the organizational process and on an on-going basis.

Alternatively, the lawyer may view himself or herself as representing just one

or some of the initial organizers and investors. In any case, the lawyer has an

ethical obligation to make the nature and scope of this representation clear to

all the organizers and investors.

ORGANIZING AND ADVISING A SMALL BUSINESS §1.2

LLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 1 — 7

Rule 1.13(a) of the Illinois Rules of Professional Conduct of 2010 (RPC)

states that if a lawyer is retained by an organization, he or she represents the

organization. Further, RPC 1.13(f) states that in dealing with the

organization’s officers, directors, shareholders, and other constituents, the

lawyer has an obligation to explain the identity of the client whenever it

appears that the organization’s interests are averse to those of some or all the

constituents. In order to avoid any risk arising from a conflict that exists but

is not immediately obvious to the parties or counsel, counsel is advised to

clarify the identity of the client at the outset of any engagement involving

creation of a business organization or representation of an existing

organization. The individuals who first approach the lawyer should be told,

both in person and in writing (preferably in the form of an engagement letter),

who the lawyer is representing and what might happen if a conflict ever arises

between this client and any of the other individuals who are contacting the

lawyer initially. If a dispute arises among the individual owners of the new

entity at some future date, the lawyer who created the entity may have a

conflict that prevents him or her from representing any of the owners in the

dispute.

To avoid disappointment or some more litigious sentiment on the part of

the owners when they discover that they must seek other counsel, clarity in

the initial meetings and in the written engagement letter is essential. A lawyer

representing an organization could include a simple statement to that effect in

the engagement letter:

We understand [law firm] would be retained as counsel to

[corporation/entity] in connection with [nature of engagement]. We have

assumed that we would be representing [corporation/entity] in these

transactions. This means that we do not represent any individual equity

holder, officer, director, member, manager, or partner of

[corporation/entity], and those individuals would need to seek independent

counsel.

§1.3 ELEMENTS OF ILLINOIS LAW: ORGANIZING AND ADVISING A SMALL BUSINESS

1 — 8

WWW.IICLE.COM

III. CHOOSING THE FORM OF BUSINESS ENTITY

A. [1.3] Sole Proprietorship

The sole proprietorship is the simplest form of business entity, consisting

of a single person carrying on a business for profit. Using this form means that

beginning and ending the business venture are uncomplicated steps requiring

little more than the decision of the sole proprietor. This can be an advantage,

especially when the proprietor is not certain whether he or she will wish to

continue the venture for any significant length of time and, thus, is unwilling

to spend much money on filings, legal drafting, and the like.

The disadvantages of the sole proprietorship also arise out of its

simplicity. The sole proprietorship does not have any legal existence separate

from that of its owner. This simplicity removes the need for organizational

documents, meetings of directors or shareholders, and written consents. It also

removes any shield from liability that might otherwise protect the proprietor.

Thus, the proprietor is personally liable for all obligations of the business.

Insurance can sometimes alleviate this liability concern, but this issue should

be addressed when advising a client on the possibility of operating as a sole

proprietorship.

B. Partnership

1. [1.4] General Partnership

All Illinois general partnerships are subject to the Uniform Partnership

Act (1997) (UPA (1997)), 805 ILCS 206/100, et seq. Although adopted in

2003, the UPA (1997) became operative for preexisting partnerships (other

than those opting in sooner) on January 1, 2008. 805 ILCS 206/1206(b).

A detailed comparison of the UPA (1997) and the former Uniform

Partnership Act, 805 ILCS 205/1, et seq., which dates back to 1917, is outside

the scope of this handbook. An excellent discussion of the changes in Illinois’

partnership law effected by the UPA (1997) is contained in Steven G. Frost,

Illinois’ Revised Uniform Partnership Act, 90 Ill.B.J. 644 (2002).

ORGANIZING AND ADVISING A SMALL BUSINESS §1.4

LLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 1 — 9

A general partnership is an association of at least two persons carrying on

a business as coowners, whether or not the persons intend to form a

partnership. 805 ILCS 206/202(a). Under the UPA (1997), each partner has

the power to bind the partnership unless a third party with whom the partner

is dealing has actual knowledge that the partner has no authority to act on

behalf of the partnership in a particular matter. 805 ILCS 206/301(1). The

UPA (1997) has also introduced the concept of a statement of partnership

authority, by which a partnership may file a statement in the public record that

limits the authority of one or more partners to act on behalf of the partnership.

See 805 ILCS 206/303(a)(2). In general, a statement of authority would be

filed in the real estate records if it limits authority concerning transfers of real

property and with the Secretary of State if it limits authority with respect to

other property. Limitations on authority of a partner concerning real estate are

effective if filed. See 805 ILCS 206/303(e). By contrast, a third party is not

deemed to have knowledge of a limitation on authority concerning other

property merely because the limitation is contained in a filed statement. See

805 ILCS 206/303(f).

Although the statutes contain these and several other specific operational

rules to govern partnership affairs, a written partnership agreement, if one

exists, may alter a number of these rules. For example, the statutes provide

that routine business affairs of the general partnership are to be governed by

a majority vote of the general partners regardless of their respective ownership

interests. 805 ILCS 206/401(f), 206/401(j). Similarly, partners share equally

in the profits and losses of the partnership, notwithstanding unequal

contributions to the capital of the partnership. 805 ILCS 206/401(b). A written

partnership agreement may specify different voting requirements and

different profit-sharing arrangements. See 805 ILCS 206/103(a). Thus,

counsel must urge clients to consider these “default” provisions carefully

before deciding to skip the step of negotiating and drafting a partnership

agreement.

As in the case of a sole proprietorship, participants in a general

partnership remain individually and personally liable for the general

partnership’s obligations, including liabilities incurred on behalf of the

§1.4 ELEMENTS OF ILLINOIS LAW: ORGANIZING AND ADVISING A SMALL BUSINESS

1 — 10

WWW.IICLE.COM

partnership by any of the partners. As noted above, the UPA (1997) has

introduced an important ability for a partnership to limit its liability for certain

acts of certain partners in the form of the statement of partnership authority.

See 805 ILCS 206/303. Subject to this limitation, this personal liability

extends to liabilities created by the acts or omissions of the other partners as

well as to liabilities incurred by the partner being charged with them. See 805

ILCS 206/301, 206/305, 206/306. Thus, partners in a general partnership must

have a high degree of comfort about the business abilities and good faith of

their fellow partners.

Among the changes effected by the UPA (1997) is a heightened emphasis

on the contractual nature of the partnership agreement. However, there are a

few exceptions to the general rule that the partnership agreement can modify

any of the “default” provisions specified in the UPA (1997). See 805 ILCS

206/103(b). Among other things, the UPA (1997) states that the partnership

agreement cannot unreasonably restrict a partner’s access to books and

records of the partnership, a partner’s fiduciary duties (including obligations

of good faith and fair dealing), or certain rights of a partner to dissociate from

the partnership. Id. The partnership agreement may specify a finite term for

the partnership or certain triggering events that will cause the partnership to

terminate. In addition, the partnership will dissolve (a) by the express will of

any partner when no definite term is specified; (b) by the express will of all

partners regardless of specification of a term in the partnership agreement; (c)

upon the dissociation of any partner, whether by death or otherwise, if at least

half the remaining partners elect to dissolve; (d) upon the occurrence of any

event that makes it unlawful for the business of the partnership to continue;

or (e) by court order. 805 ILCS 206/801.

Notwithstanding the pass-through of liability from the general partnership

to the partners for partnership obligations, the partnership is recognized as a

separate legal entity. As such, it enters into contracts in its own name, it can

sue or be sued, and it is permitted to own property. See, e.g., 805 ILCS

206/302, 206/307.

For federal income tax purposes, partnership gain and loss are allocated

among the partners, and the partnership does not bear any tax burden or

ORGANIZING AND ADVISING A SMALL BUSINESS §1.4

LLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 1 — 11

receive any tax benefit as a result of this gain or loss. The partnership’s gain

and loss are deemed to have been passed through to the partners in proportion

to their partnership percentage ownership or as otherwise specified in the

partnership agreement. See §§701, 702, and 704 of the Internal Revenue Code

of 1986; 26 U.S.C. §1, et seq. See also Treas.Reg. §301.7701-3. See also §1.24

below. Thus, a partnership structure will avoid the double taxation problems

associated with C corporations. See §1.7 below. However, this single taxation

comes with certain burdens that should be discussed with clients. For

example, unlike stockholders of a corporation, the equity owners of a

partnership will probably have to file state income tax returns and pay state

income taxes in many of the states in which the partnership earns taxable

income because of the pass-through of all partnership income and the

attribution of this income, including its nature and source, to the partners.

Clients and their counsel or tax planners should consult the state tax laws in

every state in which the client proposes to generate income.

Also, when creating the capital structure of the partnership and drafting

provisions concerning allocations of gain and loss in the partnership

agreement, counsel and clients should be aware that the Internal Revenue

Service (IRS) will evaluate these allocations under its “substantial economic

effect” standards. See §1.24 below. This may mean that the partners will be

somewhat constrained in the way they structure their allocations of ownership

interest, gain, and loss.

Further, partners in a partnership may have the burden of paying tax on

“phantom income.” For example, if the partnership makes political

contributions or incurs certain types of client entertainment expenses, these

contributions and expenses have the effect of decreasing the amount of money

available for distribution to the partners but are not tax deductible to the

partners. Thus, the partners will be deemed to have received the full amount

of the partnership’s taxable income without reduction for political

contributions or other nondeductible items, and the partners will be taxed

accordingly. The amount of these nondeductible expenses may exceed the

amount of deductions that do not require a cash expenditure by the entity, such

as depreciation. Sometimes, the net effect is that the partners will have a tax

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burden based on an income number larger than the amount of actual cash

income received by the partners. Clients considering a partnership structure

should be advised of these ramifications.

Counsel also should raise with clients the possibility of including

provisions in the partnership agreement that require the partnership to make

distributions at least large enough to cover the partners’ tax obligations, to the

extent that the partnership has distributable cash to make these distributions.

Without negotiating such a provision in advance, the partners may be unable

to agree at tax time about how and when to make these distributions and in

what amounts. Note that these same tax concerns also apply to the other pass-

through entities, such as limited partnerships, S corporations, and limited

liability companies.

Under the UPA (1997), a partner may voluntarily or involuntarily

“dissociate” from the partnership; events triggering a dissociation include

death or bankruptcy. See 805 ILCS 206/601, 206/602. Some types of partner

dissociations may, under certain circumstances, trigger dissolution of the

partnership, and the terms of a partnership agreement can eliminate, confirm,

or expand on virtually all these dissolution scenarios. See generally 805 ILCS

206/603, 206/801.

2. [1.5] Limited Partnership

The Uniform Limited Partnership Act (2001) (ULPA (2001), 805 ILCS

215/0.01, et seq., governs limited partnerships and creates another new limited

liability entity, the limited liability limited partnership (LLLP). See 805 ILCS

215/102(11), 215/201(a)(4).

ULPA (2001) has applied to all limited partnerships and LLLPs,

regardless of their date of formation, since January 1, 2008. 805 ILCS

215/1206. However, with respect to limited partnerships formed before

January 1, 2005, several of the provisions of ULPA (2001) do apply unless

the partners specifically approve them in the manner provided in their

partnership agreement or by law. See 805 ILCS 215/1206(c).

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Prior to January 1, 2005 (and, for partnerships in existence as of January

1, 2005, prior to January 1, 2008), Illinois limited partnerships were governed

by the Revised Uniform Limited Partnership Act (RULPA). A detailed

comparison of ULPA (2001) and RULPA is outside the scope of this

handbook.

A limited partnership is much like a general partnership in most respects.

The significant difference is that while a limited partnership contains one or

more general partners whose rights and liabilities are just like those of partners

in a general partnership, it also contains one or more limited partners. Under

RULPA, a limited partner was distinguished by being passive with respect to

the operation of the business and by having limited liability for partnership

obligations. Under ULPA (2001), by contrast, a limited partner may preserve

his or her liability limitation, even if he or she participates in the management

and control of the limited partnership. See 805 ILCS 215/303. ULPA (2001)

also introduced the LLLP, an entity in which the general partners are also

shielded from liability for partnership obligations. See §1.6 below. Although

it is perhaps still too early to speculate, the existence of this newer LLLP entity

does not seem to be causing a decline in the use of the limited liability

company (LLC) or limited partnership entities. For example, the LLLP entity

is still not recognized in all 50 states, and even in Illinois (which recognizes

it), it cannot be used in all situations. For example, law firms are not permitted

to use the LLLP form under the relevant Supreme Court rules. See Supreme

Court Rule 721(a).

A written agreement of limited partnership will usually specify the

amount of capital that each partner must contribute to the partnership both

initially and, if needed, from time to time thereafter. The contribution

obligations (and any other obligations) that the partners have agreed on

(usually contained in a limited partnership agreement) are the extent of the

limited partners’ obligations to the partnership. Under RULPA, it was

essential that these obligations be included in a written agreement because

they are enforceable by the partnership against any limited partner only if

contained in a writing signed by the limited partner. See former 805 ILCS

210/502(a). By contrast, ULPA (2001) eliminated almost all requirements for

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written agreements, although the Act does still require that the partnership

keep some basic types of records. See 805 ILCS 215/111. Clients should be

strongly advised to negotiate and sign a written agreement of limited

partnership, notwithstanding the permissive provisions of ULPA (2001) on

this point; a written agreement is the safest and surest way to confirm and

memorialize the agreements of the partners concerning management, control,

contributions, and profit sharing.

As in the case of general partnerships, the IRS will evaluate provisions

concerning allocations of gain and loss in the partnership agreement using its

“substantial economic effect” standards. See §1.24 below. Again, this may

mean that the partners will be somewhat constrained in the way they structure

their allocations of ownership interests, gain, and loss.

A corporation may be a general partner or a limited partner in a limited

partnership. See 805 ILCS 215/102(10), 215/102(12). A limited partnership

has a perpetual duration, although the partners could agree on a shorter life

for the partnership in the partnership agreement. See 805 ILCS 215/104(c),

215/110(a).

In contrast to general partnership law, RULPA provided that a limited

partnership was not dissolved by the death of a limited partner, and a limited

partner could not compel dissolution of the partnership absent contrary

provisions in the partnership agreement. See former 805 ILCS 210/801.

However, ULPA (2001) made significant changes in this regard. Under

RULPA, the written consent of all partners was required to dissolve a limited

partnership. See former 805 ILCS 210/801(b). By contrast, under ULPA

(2001), the limited partnership may be dissolved with the consent of all

general partners and of limited partners owning a majority of the rights to

receive distributions as limited partners as of the effective date of the consent.

See 805 ILCS 215/801(2).

Like the general partnership form, the limited partnership form allows for

taxable gain to be divided among the partners; only one level of income tax is

imposed on this gain to the partners to whom the gain is deemed to have been

distributed. This form also provides limited liability to the limited partners.

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However, in exchange for this limited liability, under RULPA, the limited

partners had to remain removed from the day-to-day operations of the

organization. In a RULPA limited partnership, limited partners who became

involved in the operations of the partnership risked losing their limited

liability. See former 805 ILCS 210/303(a).

ULPA (2001) essentially removed these concerns by stating that limited

partners are not liable for obligations of the limited partnership, even if the

limited partners participate “in the management and control of the limited

partnership.” 805 ILCS 215/303.

Despite the implication in ULPA (2001) §303 that limited partners may

participate in the control of the limited partnership, the remainder of the Act

remains mostly consistent with the traditional separation of duties between

limited and general partners. Thus, in the limited partnership form, at least

one participant must agree to serve as the general partner, with primary

responsibility for the operations of the partnership and liability for its

obligations. The general partner of a limited partnership may be a corporation

or limited liability company, and taking this approach is one way to limit the

liability exposure of the investors standing behind the general partner. If the

general partner were a corporation or limited liability company, then its

liability arguably would be limited to the assets and capitalization of the

corporate entity. To make this strategy effective, the corporate general partner

would be given only enough assets to enable it to purchase its interest in the

limited partnership.

Prior to January 1, 1997, limited partnerships had to include at least two

noncorporate characteristics in order to qualify for the favorable pass-through

tax treatment for partnership income under the Kintner test. See the discussion

of United States v. Kintner, 216 F.2d 418 (9th Cir. 1954), in §1.46 below.

Commentators at that time worried that having a scantily capitalized general

partner might make the limited partnership look as if all its partners were

effectively shielded from liability, thus giving the partnership the

characteristic of limited liability for all investors. See, e.g., James C. Dechene,

Preferred Provider Organization Structures and Agreements, 4 Annals Health

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L. 35, 43 (1995) (Dechene); S. Stacy Eastland, The Art of Making Uncle Sam

Your Assignee Instead of Your Senior Partner: The Use of Family

Partnerships in Estate Planning, C901 ALI-ABA 581 — Planning

Techniques for Large Estates (1994).

With the advent of the IRS’s “check-the-box” rules in 1997 (see

Treas.Reg. §301.7701-1, et seq.), these concerns have diminished, although

some commentators continue to worry that an under-capitalized general

partner in a limited partnership may expose the limited partners to liability for

partnership obligations under a “veil-piercing” theory. See, e.g., Dechene, p.

43. To successfully pierce the limited partnership’s liability veil under such a

theory, a plaintiff would presumably have to be able to distinguish that

scenario (i.e., the general partner that was scantily capitalized from the outset

in a clear attempt to limit exposure) from one in which a general partner was

legitimately and fully capitalized at the outset of the limited partnership’s life

but suffered a reduction in its net worth for legitimate reasons. At least one

Illinois court has cited under-capitalization of a corporation in affirming a

veil-piercing decision. See Wachovia Securities, LLC v. Banco

Panamericano, Inc., 674 F.3d 743, 752 – 753 (7th Cir. 2012).

Like the general partnership, the limited partnership is recognized as a

separate legal entity. See generally 805 ILCS 215/104(a). As such, it enters

into contracts in its own name, it can sue or be sued, and it is permitted to own

property. See 805 ILCS 215/105. The difference is that each limited partner

is personally liable to the partnership only for the contribution obligations he

or she has agreed to make to the partnership. RULPA required that a limited

partner’s contribution agreement had to be made in a writing signed by the

limited partner. See former 805 ILCS 210/502(a). By contrast, ULPA (2001)

does not require that the contribution agreement be in writing. See 805 ILCS

215/502. Nonetheless, counsel should strongly encourage clients to

memorialize agreements concerning contribution and other important

management and finance issues in a written agreement signed by all partners.

Reliance on unwritten agreements concerning these important points is an

invitation to dispute and litigation. As noted above, under RULPA, as long as

they did not act as general partners, the limited partners were not liable to third

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parties for the partnership’s obligations. See former 805 ILCS 210/303(a). By

contrast, ULPA (2001) §303 clearly confirms that limited partners will not

lose their limited liability if they become involved in management of the

partnership.

Clients seeking to create limited partnerships also should be advised of

the tax ramifications of this choice, including such points as the potential tax

liability for phantom income. See §1.4 above.

Counsel should also discuss the provisions of ULPA (2001) concerning

dissociation with clients forming limited partnerships, because those rules

may not be intuitively obvious to businesspeople. ULPA (2001) provides that

a limited partner has no right to dissociate as a limited partner before

termination of the limited partnership, although that result can be changed by

an appropriate provision in the partnership agreement. See 805 ILCS 215/601.

Similarly, ULPA (2001) provides that a limited partner who dissociates (i.e.,

leaves the partnership before it terminates) has no immediate right to demand

repurchase of his or her partnership interest, but that he or she simply becomes

an economic interest holder in the partnership with no authority, as against the

other partners, to participate in the control of the partnership, again subject to

any changes that the partners have included in the partnership agreement. See

805 ILCS 215/602, 215/702. This is different than the presumption under

RULPA, which was that a limited partner could withdraw and, unless

otherwise specified in the partnership agreement, demand the fair value of his

or her interest in the partnership. See former 805 ILCS 210/604. The rules

concerning dissociation of general partners are also somewhat different under

ULPA (2001) from what they were under RULPA. Briefly, under ULPA

(2001), a general partner who dissociates becomes an economic interest

holder, with no authority to control the partnership and no ability to demand

repurchase of his or her partnership interest, unless otherwise specified in the

partnership agreement. See 805 ILCS 215/605, 215/702. Again, the RULPA

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presumption was that a withdrawing partner could demand the fair value of

his or her interest in the partnership promptly following withdrawal, unless

otherwise provided in the partnership agreement. See former 805 ILCS

210/604.

3. [1.6] Limited Liability Partnership and Limited Liability

Limited Partnership

Illinois began allowing for the creation of registered limited liability

partnerships (LLPs) in 1994. Now, all 50 states have modified their

partnership laws to permit general partnerships to register as LLPs. Susan

Saab Fortney, High Drama and Hindsight: The LLP Shield, Post-Anderson,

12 Bus.L. Today 47 (Feb. 2003) (Fortney). The LLP statutes are included

within the framework of the Uniform Partnership Act (1997) (and its

predecessor statute in states that have not accepted the UPA (1997)). See 805

ILCS 206/1001. No entity can be created as an LLP. Rather, the entity must

first organize as a general partnership and then elect LLP status within the

partnership statute.

Aside from the filing of a form to elect LLP status (Form UPA-1001,

Illinois Uniform Partnership Act Statement of Qualification, which is

available at the Secretary of State’s website at www.cyberdriveillinois.com),

an LLP can be organized and operated much like a general partnership. The

primary difference is in the liability of the partners in the LLP. Basically,

partners in general partnerships are jointly and severally liable for all

obligations of the partnership, including losses or injuries caused to any

person by the wrongful acts or omissions of any other partner acting in the

ordinary course of partnership business. 805 ILCS 206/306(a). In a minority

of states, the LLP statutes provide that partners in an LLP are jointly and

severally liable for everything chargeable to the partnership and for all other

debts and obligations of the partnership. This type of LLP statute is sometimes

called a “partial shield” statute because it only shields an LLP partner for

certain types of malpractice liability of other partners and employees of the

partnership who are not under that partner’s direct supervision or control.

Until 2003, when Illinois adopted the UPA (1997), this was the case in Illinois.

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See Fortney, supra; former 805 ILCS 205/15(b). However, when Illinois

adopted the UPA (1997), it elected a “full shield” type of statute for LLPs.

Thus, partners in an Illinois general partnership that has elected LLP status

are not liable for debts, obligations, and liabilities of the partnership. 805 ILCS

206/306(c). This limitation on liability does not limit or eliminate a partner’s

liability for his or her own negligence, wrongful acts, omissions, misconduct,

or malpractice or that of any other person under his or her direct supervision

and control. See id. See generally Steven G. Frost et al., Limited Liability

Practice: What Lawyers Should Consider, What Firms Should Do, 91 Ill.B.J.

388, 390 (2003) (also provides excellent list of tasks and considerations

involved in having existing general partnership elect LLP status) (Frost 2003).

See also Steven G. Frost, Illinois’ Revised Uniform Partnership Act, 90 Ill.B.J.

644, 647 (2002).

In 2005 another type of partnership entity became available in Illinois:

the limited liability limited partnership. This entity, created by the Uniform

Limited Partnership Act (2001), is being created in a growing number of states

and it provides a full, status-based liability shield to both general and limited

partners in the limited partnership. Limited partnerships formed under

RULPA or under ULPA (2001) may elect to become LLLPs by filing a simple

statement in their certificate of limited partnership (or by amending their

certificate to include such a statement). See 805 ILCS 215/102(11),

215/201(a)(4), 215/202.

The LLLP form preserves the liability limitation for limited partners, and

under ULPA (2001), that shield applies whether or not the limited partners are

involved in the management of the partnership. See 805 ILCS 215/303.

However, in addition, the LLLP form also provides limited liability for all

general partners of the LLLP, thus giving all partners essentially the same

liability shield as that enjoyed by corporate shareholders and limited liability

company members. See 805 ILCS 215/404(c).

The LLP and the LLLP forms appear, at first blush, to be similar.

However, the LLLP form continues to maintain the distinction between

limited partners (who have no right or power to bind the partnership) and

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general partners (who have equal rights in the management and conduct of the

limited partnership’s activities). See 805 ILCS 215/302, 215/406(a). Thus, the

LLLP form may be more appropriate when the parties wish to create that

distinction while still enjoying the advantages of limited liability for all

partners.

Because they are both relatively new types of entities, LLPs and LLLPs

have not yet been addressed in several professional statutes. Thus, if a client

wishes to use the LLP or the LLLP form to practice in a regulated profession

(e.g., medicine, law, accounting, or engineering), counsel is advised to consult

the corresponding professional statutes and regulations to confirm that use of

the LLP or the LLLP form is permitted. See §1.9 below.

By way of example, attorneys in Illinois were first permitted to practice

in limited liability partnerships effective July 1, 2003, when the Illinois

Supreme Court amended Supreme Court Rule 721 and added S.Ct. Rule 722.

See Frost 2003, pp. 388 – 389. The rules regulating the corresponding

profession may also have additional restrictions or prerequisites that relate to

the liability protection of the LLP or the LLLP structure. See, e.g., S.Ct. Rule

722(b), which provides that Illinois lawyers practicing in an LLP will have

the benefit of the liability protection provisions of the LLP statute if the

partnership maintains minimum insurance or proof of financial responsibility,

and S.Ct. Rule 722(c), which provides that an Illinois lawyer remains

personally liable for claims arising out of acts, errors, or omissions in the

performance of professional services by the lawyer or any person under the

lawyer’s direct supervision and control, notwithstanding the liability

protection provisions of the LLP statute. Practitioners should note that the

Supreme Court Rules also apply to lawyers practicing in other types of limited

liability entities, such as professional limited liability companies. See §1.9

below. As noted above, the Illinois Supreme Court rules have some limitations

on which entities may practice law. For example, lawyers may not use the

LLLP form. See S.Ct. Rule 721(a).

Similarly, caselaw discussing the structures and liability limitations of

LLP and LLLP statutes is not as voluminous as for other types of entities.

Clients should be alerted to this fact, and counsel should consider emphasizing

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the importance of a clearly written, well thought out partnership agreement to

avoid costly litigation or disagreements among partners in the future. Clients

seeking to create LLPs or LLLPs also should be advised of the tax

ramifications of this choice, including such points as the potential tax liability

for phantom income. See §1.4 above.

C. Corporation

1. [1.7] C Corporation

A corporation is a distinct legal entity, separate and apart from its owners.

All the advantages and many of the costs of placing a business within a

corporate framework arise from this legal status. The standard corporate form

is sometimes called a “C corporation” because its status as a separate legal

entity is recognized and taxed accordingly under Subchapter C of the Internal

Revenue Code. See 26 U.S.C. §§301 – 385. Illinois corporations are governed

by the Business Corporation Act of 1983 (BCA), 805 ILCS 5/1.01, et seq.

As a distinct legal entity, a corporation can enter into contracts, it can sue

or be sued, and it can hold title to real property, all in its own name. 805 ILCS

5/3.10. The corporation’s owners, called “shareholders,” are passive investors

in the business venture and, as long as their shares of corporation stock are

fully paid and nonassessable (i.e., the corporation has received at least the par

value for each of the shares), they have no liability for debts of the corporation.

805 ILCS 5/6.40. The corporation’s officers and its board of directors —

employees of the corporation — are responsible for managing the

corporation’s business affairs. 805 ILCS 5/8.05(a), 5/8.50. With a few limited

exceptions, officers and directors are not liable for obligations of the

corporation (see, e.g., 805 ILCS 5/8.65), and the corporation may indemnify

officers and directors if they are sued or otherwise suffer damage by reason of

the fact that they were serving as officers and directors. 805 ILCS 5/8.75(a),

5/8.75(b). The BCA’s provision on indemnification was amended to clarify

that when the board is approving indemnification for a director (whether by

action of the whole board or a committee), the approval must come from

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directors who are not parties to the action, suit, or proceeding. See 805 ILCS

5/8.75(d). If indemnification and liability protection are particularly important

to a client in a given situation, counsel should consider discussing these

procedural steps with the client; it will be important to follow them if any

claims for indemnification arise, particularly in cases involving numerous

shareholders who are not also officers and directors.

In order to preserve its separate legal identity and all the benefits that flow

from it, the corporation, its officers, and its directors must observe corporate

formalities. Corporations must make initial and subsequent annual filings with

the states in which they do business in order to maintain their rights to do

business in these states. Contracts and agreements that relate to corporate

matters must be signed in the corporation’s name and not in the names of

individual officers or shareholders. The directors and shareholders of the

corporation must meet at least annually to handle certain “housekeeping”

matters, and major transactions and agreements should be approved in

advance by the directors and, in some cases, the shareholders. Most

importantly, corporate funds must not be intermingled with the funds of

individuals involved in the venture. See generally Charles W. Murdock,

BUSINESS ORGANIZATIONS §8.9 (2d ed. 2010) (Vol. 7 of West’s

ILLINOIS PRACTICE SERIES). See, e.g., People v. V & M Industries, Inc.,

298 Ill.App.3d 733, 700 N.E.2d 746, 750 – 751, 233 Ill.Dec. 218 (5th Dist.

1998).

Illinois courts have applied a two-part test to determine when to pierce

the corporate veil and hold shareholders, officers, and directors liable for the

obligations of the corporation: (a) the facts must disclose that there is such a

unity of interest and ownership that the separate personalities of the

corporation and the individual no longer exist; and (b) the facts must disclose

that adherence to the fiction that the corporation is a separate legal person

would sanction a fraud, promote an injustice, or lead to inequitable

consequences. See, e.g., Fontana v. TLD Builders, Inc., 362 Ill.App.3d 491,

840 N.E.2d 767, 776, 298 Ill.Dec. 654 (2d Dist. 2005). In Fontana, the

appellate court was willing to uphold a finding that veil-piercing was justified

and that a corporation’s president should be held liable for the corporation’s

obligations even though that individual was not a shareholder of the

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corporation. 840 N.E.2d at 785. The Fontana court acknowledged that in veil-

piercing cases stock control often is a prerequisite, but the court went on to

conclude that actual stock ownership is not required to satisfy the first “alter

ego” prong of the test. 840 N.E.2d at 777 – 778. The factors that were

particularly important to the Fontana court’s willingness to uphold a veil-

piercing included inadequate capitalization, failure to issue stock certificates

or observe other corporate formalities, nonfunctioning officers and directors,

and inadequate corporate record keeping (such as not documenting

shareholder loans and not documenting whether distributions from the

company to individuals constituted salary, repayment of loan principal,

repayment of loan interest, or dividends). 840 N.E.2d at 778 – 781. Thus,

clients need to be reminded of the importance of these types of formalities if

liability protection is a critical factor in selecting the corporate form.

In general, shareholders of a corporation do not owe it a fiduciary duty

solely by virtue of their status as shareholders, other than the duty to pay the

corporation the full consideration for which their shares were issued. See 805

ILCS 5/6.40; Dowell v. Bitner, 273 Ill.App.3d 681, 652 N.E.2d 1372, 1379,

210 Ill.Dec. 396 (4th Dist. 1995); Hagshenas v. Gaylord, 199 Ill.App.3d 60,

557 N.E.2d 316, 321, 145 Ill.Dec. 546 (2d Dist. 1990). See also William R.

Quinlan and John F. Kennedy, The Rights and Remedies of Shareholders in

Closely Held Corporations Under Illinois Law, 29 Loy.U.Chi.L.J. 585, 588

(Spring 1998). Directors and officers, by contrast, owe fiduciary duties of care

and loyalty to their corporations, at least as long as they serve in these roles.

See Charles W. Murdock, BUSINESS ORGANIZATIONS §§13.1, 14.1 (2d

ed. 2010) (Vol. 8 of West’s ILLINOIS PRACTICE SERIES).

However, in some closely held corporations (i.e., corporations with few

stockholders), these principals are not universally true. Illinois courts have

held that in a closely held corporation, especially one in which the

shareholders elect themselves as officers and directors and essentially run the

business themselves, the fiduciary duties of partnership will be more

applicable. See, e.g., Dowell, supra, 652 N.E.2d at 1379; Hagshenas, supra,

557 N.E.2d at 322 – 324. See also Rexford Rand Corp. v. Ancel, 58 F.3d 1215,

1218 – 1221 (7th Cir. 1995). These courts have concluded that officers and

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directors of closely held corporations may continue to owe fiduciary duties to

their corporations even after they resign and that shareholders of closely held

corporations may owe fiduciary duties to one another. These courts also have

concluded that shareholders of closely held corporations (even if not electing

the close corporation form of 805 ILCS 5/2A.05) may continue to owe

fiduciary duties to their corporations, even after they resign from all officer

and director positions with the corporation. These kinds of duties may even

apply to minority shareholders who have been effectively “frozen out” of

corporate operations (e.g., by their involuntary removal from all officer and

director positions by the majority shareholder). See, e.g., Rexford Rand, supra,

58 F.3d at 1220 – 1221; Dowell, supra, 652 N.E.2d at 1379.

The opinions in Dowell, Hagshenas, and Rexford Rand are somewhat

muddy in their discussion of whether their holdings apply broadly to any

closely held corporation or whether they are specifically aimed at statutory

close corporations. See §§1.11 and 1.44 below. The term “close corporation”

is sometimes (confusingly) used in these opinions to mean either of two

different types of entities. One is the statutory close corporation (discussed in

§1.11 below) in which the shareholders have made a statutory election to

eliminate the board of directors and otherwise to streamline their internal

operations. The term is also sometimes used to refer to closely held

corporations (i.e., those with few stockholders).

Because Illinois courts have a reputation for broadly applying these

fiduciary duty concepts to both statutory close corporations and corporations

that have not elected that status but are merely owned by a small number of

shareholders, practitioners should assume that if the entity will be closely

held, the client should be advised of these duties. See generally Thomas M.

Madden, Do Fiduciary Duties of Managers and Members of Limited Liability

Companies Exist as with Majority Shareholders of Closely Held

Corporations?, 12 Duq.Bus.L.J. 211, 238 – 241 (Summer 2010).

From a tax perspective, one of the biggest disadvantages to the corporate

form is its attribute of double taxation. In the C corporation structure, the

corporation is taxed on its net income. If the corporation distributes any of

that post-tax net income to its shareholders, a second layer of income tax is

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assessed against the individual shareholders on the dividend income they

receive. This double tax payment significantly reduces the amount of net

funds actually received by the shareholders when they receive dividends. To

avoid this problem, C corporations sometimes seek other means of

distributing funds to shareholders, such as characterizing the payments as

salaries. However, these solutions are unworkable if not all shareholders will

be working for the corporation or if the amounts to be distributed exceed what

the IRS would deem to be a reasonable salary.

2. [1.8] S Corporation

An S corporation is a corporation that has elected special tax treatment

under Subchapter S of the Internal Revenue Code. See 26 U.S.C. §§1361 –

1379. The S corporation structure avoids the problem of double taxation of

income (see §1.7 above). For income tax purposes, an S corporation,

generally, is not taxed on its income or gain; all the S corporation’s taxable

gain is deemed to pass through directly to the shareholders, and they are taxed

on it regardless of whether they actually receive it. In this way, the tax

treatment of the S corporation mirrors that of the partnership.

The S corporation obtains this tax benefit in exchange for a certain lack

of flexibility, and in order to make an election to be treated as an S

corporation, an entity must meet several important criteria. The Small

Business Job Protection Act of 1996, Pub.L. No. 104-188, 110 Stat. 1755,

amended the Internal Revenue Code of 1986 to relax some of these criteria,

making the S election potentially attractive in a wider variety of situations.

These criteria have been relaxed even further by the American Jobs Creation

Act of 2004, Pub.L. No. 108-357, 118 Stat. 1418, signed by the President on

October 22, 2004.

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In order to make the S election, a corporation must meet the following

criteria:

a. It may have no more than 100 shareholders.

b. All shareholders must be individuals, estates, “electing small

business trusts” (as defined below), or “qualified tax-exempt shareholders”

(as defined below).

c. No shareholder may be a nonresident alien.

d. The corporation may have only one class of stock. See generally 26

U.S.C. §1361(b)(1).

In addition to increasing the cap on the number of shareholders to 100, the

2004 amendments also liberalized the ownership rules for S corporations by

providing that family members are now counted as one shareholder. See 26

U.S.C. §1361(c)(1).

The entities that are permitted to be shareholders of S corporations

include certain types of grantor trusts, voting trusts, certain testamentary

trusts, and “qualified subchapter S trusts.” A qualified subchapter S trust is a

trust, the terms of which provide that (a) the trust can have only one current

income beneficiary (for life), (b) any corpus distributed during the life of the

beneficiary must be distributed to the beneficiary, (c) the beneficiary’s income

interest must terminate at the earlier of the beneficiary’s death or the

termination of the trust, and (d) if the trust terminates during the beneficiary’s

life, the trust assets must be distributed to the beneficiary. 26 U.S.C.

§1361(d)(3).

In addition, “electing small business trusts” also may be shareholders of

S corporations. 26 U.S.C. §1361(c)(2)(v). In order to qualify for this

treatment, all beneficiaries of the trust must be individuals or estates eligible

to be S corporation shareholders, with one exception for charitable

organizations, which may hold contingent remainder interests in these trusts

without disqualifying them for this treatment. 26 U.S.C. §1361(e)(1)(A)(i).

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No interest in an “electing small business trust” may be acquired by purchase.

26 U.S.C. §1361(e)(1)(A)(ii). Each potential current beneficiary of the trust is

counted as a shareholder for purposes of the 100-shareholder limitation, but if

a potential current beneficiary is already a shareholder, this person is counted

only once. A potential current beneficiary is anyone who is entitled to or, at

the discretion of any person, may receive a distribution from the principal or

income of the trust. 26 U.S.C. §1361(e)(2).

S corporations may have wholly owned subsidiaries. See 26 U.S.C.

§1361(b)(3)(A). An S corporation even may have a C corporation as a

subsidiary, although the S corporation cannot join in a consolidated return

with its C corporation subsidiaries. See 26 U.S.C. §1504(b)(6); Joint

Committee on Taxation, General Explanation of Tax Legislation Enacted in

the 104th Congress, pp. 119 – 122 (Dec. 18, 1996) (available at the website

of the Joint Committee on Taxation at www.jct.gov).

S corporations also may hold subsidiaries that are qualified subchapter S

subsidiaries if the S corporation parent owns 100 percent of the stock of the

subsidiary. 26 U.S.C. §1361(b)(3)(B). A “qualified subchapter S subsidiary”

is defined as a domestic corporation that would be eligible to make an election

under Subchapter S if its shares were owned directly by the shareholders of

its S corporation parent. Id. If an S corporation owns a qualified subchapter S

subsidiary, the subsidiary is not treated as a separate corporation for tax

purposes. 26 U.S.C. §1361(b)(3)(A)(i). See also Joint Committee, supra, p.

121. Thus, in certain cases, an S corporation now can be part of an affiliated

group of corporations.

Since the adoption of the 1996 amendments financial institutions have

been permitted to elect S status unless they use the reserve method of

accounting for bad debts under Code §585. 26 U.S.C. §1361(b)(2)(A). In this

regard, the 2004 amendments further liberalized in several ways the rules

governing S corporations that are banks. Among other things, individual

retirement accounts may now be shareholders of banks that are S corporations.

See 26 U.S.C. §1361(c)(2).

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The group of permissible holders of S corporation shares was also

expanded in the 1996 amendments by the addition of certain tax-exempt

entities. Previously, tax-exempt organizations could not be shareholders in an

S corporation. Pursuant to the amendments, qualified tax-exempt shareholders

may own shares of an S corporation. 26 U.S.C. §1361(b)(1)(B). A “qualified

tax-exempt shareholder” is one described either in Code §401(a), relating to

qualified retirement plan trusts, or in Code §501(c)(3), relating to certain

charitable organizations. 26 U.S.C. §1361(c)(6). This provision permits

employee stock ownership plans (ESOPs) and certain other benefit plans to

be shareholders of S corporations, thereby providing those plans and their

participants with an important tax benefit.

Insurance companies, domestic international sales corporations, and

certain other types of corporations remain ineligible to hold shares of S

corporation stock. 26 U.S.C. §1361(b)(2).

Before it can elect S status, an entity must be incorporated as a C

corporation. Then, in order to obtain S status for a given tax year, the

corporation must file an election to be treated as a “small business

corporation” on IRS Form 2553 on or before the 15th day of the third month

of that tax year. 26 U.S.C. §1362(b)(1). Thus, if an entity is electing S status

concurrently with its incorporation, it must file the election form within two

months and 15 days of its incorporation. If the election is filed after this date,

it will not take effect until the next tax year. Form 2553 is available at

www.irs.gov.

An S corporation may voluntarily terminate its S status at any time, and

the IRS may find that the status has terminated involuntarily because of a

failure to meet the threshold requirements outlined above. In any event,

following a termination of S status for any reason, a corporation is precluded

from reapplying for S status for five years. 26 U.S.C. §1362(g). The IRS may

waive the effect of an inadvertent termination of an S election or an

inadvertent failure to make the S election if there was reasonable cause for the

failure to make the election in a timely manner. See 26 U.S.C. §1362(f).

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The requirement that there be only one class of stock in the S corporation

is more problematic than it appears at first. Simply making sure that there is

only one named class of stock in the corporation’s articles of incorporation is

not sufficient. Although differences in voting rights are disregarded in

determining whether there are multiple classes of stock (see 26 U.S.C.

§1361(c)(4)), other factors may be deemed to create a second class of stock.

Thus, preferential dividend rights for certain shareholders will create a second

class of stock as a practical matter. Similarly, prior to the 1996 amendments,

under Code §1361(c)(5), it was possible that corporate indebtedness could be

deemed to be a second class of stock depending on its terms. The 1996

amendments attempted to clarify and ease this requirement by permitting

financial institutions to hold certain types of safe harbor “straight debt”

without being deemed to be shareholders receiving a de facto preferential

dividend. The amendments expanded the types of debt that will be treated as

straight debt, defining “straight debt” as any written, unconditional promise

to pay on demand, or on a specified date, a certain sum in money if (a) the

interest rate and interest payment dates are not contingent on profits, the

borrower’s discretion, or similar factors, (b) there is no convertibility, directly

or indirectly, into stock, and (c) the creditor is actively and regularly engaged

in the business of lending money. 26 U.S.C. §1361(c)(5)(B).

Clients seeking to create S corporations should also be advised of the tax

ramifications of this choice, including such points as the potential tax liability

for phantom income. See §1.4 above.

3. [1.9] Professional Corporation and Benefit Corporation

The Professional Service Corporation Act, 805 ILCS 10/1, et seq.,

permits the operation of a business by licensed professionals, such as

attorneys, doctors, and accountants, in the corporate form. The primary

characteristics, advantages, and disadvantages of the generic corporate form

also apply to professional corporations. A professional corporation can be

organized only for the purpose of rendering one category of “professional

service,” which is defined as a service that requires a license from the state or

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federal government. 805 ILCS 10/6, 10/3.5. The most significant restriction

with this type of entity is that a professional corporation may have as its

officers, directors, shareholders, and employees (other than ancillary

personnel) only individuals who are duly licensed to render the particular

category of professional service for which the corporation was organized. 805

ILCS 10/3.4(a). In addition, professional corporations are restricted in that

they may merge or consolidate only with other entities organized to render the

same professional service. 805 ILCS 10/5. Following the lead set by most of

the professions involved here, the professional corporation is restricted in the

types of names it may use, most notably when the names include those of

deceased shareholders of the corporation. 805 ILCS 10/9. See also the

discussion on professional regulation in §1.20 below.

Benefit corporations are corporations incorporated under the Benefit

Corporation Act (BCA), 805 ILCS 40/1, et seq., that provide a general public

benefit, defined by the BCA to mean a “material positive impact on society

and the environment, taken as a whole, assessed against a third-party standard,

from the business and operations of a benefit corporation.” 805 ILCS 40/1.10.

These benefit corporations must specify a “general public benefit” (as defined

§1.10) and may also describe their “specific public benefit” (defined in

§1.10 to include (a) providing low-income or underserved individuals or

communities with beneficial products or services, (b) promoting economic

opportunity for individuals or communities beyond the creation of jobs in the

ordinary course of business, (c) preserving the environment, (d) improving

human health, (e) promoting the arts and sciences (or advancement of

knowledge), (f) increasing the flow of capital to entities with a public benefit

purpose, or (g) the accomplishment of any other particular benefit for society

or the environment). See 805 ILCS 40/3.01(b). A previously organized

corporation may become a benefit corporation by amending its articles of

incorporation so that they contain a statement that the corporation is a benefit

corporation. 805 ILCS 40/2.05(a). The BCA adds certain standards of conduct

for directors focused on the effects of corporate action for public benefit, and

it also creates the position of a benefit director who drafts an opinion on the

corporation’s public benefit compliance to be filed in connection with each

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annual report. 805 ILCS 40/4.01, 40/4.05. Finally, a benefit corporation can

also designate a benefit officer who can also prepare the required benefit

report. 805 ILCS 40/4.15.

Corporations may seek to obtain benefit corporation status for a number

of reasons. These include the potential for favorable public perception and the

fact that, unlike directors of standard corporations, the directors of benefit

corporations are explicitly required to consider factors other than creating

maximum value for shareholders, such as the interests of employees,

customers, and the community; environmental issues; and similar factors. See

805 ILCS 40/4.01. This could be of value for directors who want to make

corporate decisions based on those other factors and who want to reduce their

risk of liability for violation of the duties normally owed to shareholders.

4. [1.10] Limited Liability Company and Professional Limited

Liability Company

With the creation in 1994 of the Limited Liability Company Act (LLCA),

805 ILCS 180/1-1, et seq., another form of business entity became available

in Illinois. The LLCA allows for a hybrid form of doing business that

combines some of the advantages of S corporation status and partnerships

(pass-through tax treatment for income) with the limited liability and flexible

ownership structure of the corporate form. By the early part of 1996, all 50

states and the District of Columbia had adopted limited liability company

statutes. Although there are many provisions of these statutes that remain

consistent from state to state, a number differ.

Instead of partners or shareholders, an LLC has members, and rather than

directors, its members have the option of appointing managers. Members and

managers are not personally liable for the debts, obligations, or liabilities of

the LLC solely by reason of being or acting as members or managers,

respectively. 805 ILCS 180/10-10(a). Thus, they have the same limited

liability advantages as shareholders and directors of corporations.

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The right to manage the affairs of the LLC may be vested in the members

or in one or more managers, as provided in the LLC’s articles of organization.

See 805 ILCS 180/5-5(a)(4), 180/5-5(a)(5), 180/15-1. This management

authority may be further delineated or limited in the articles of organization

or in a separate operating agreement. 805 ILCS 180/5-5(a)(8), 180/15-5(a).

Privacy concerns may suggest that the general delegation of management

authority, whether to members or to managers, be included in the articles of

organization but that all details concerning this delegation be included only in

the operating agreement because the articles become a matter of public record

when filed with the Secretary of State.

Although the statute does not require an LLC to have a separate operating

agreement, clients should be urged to consider creating such an agreement

when establishing an LLC. The LLCA contains provisions that will apply in

the absence of an operating agreement (805 ILCS 180/15-5(a)), but these

provisions may not all match the clients’ expectations or desires. For example,

the LLCA provides that unless otherwise provided in an operating agreement,

new members may be admitted to the LLC only by unanimous consent of the

members (805 ILCS 180/10-1) and all interim distributions must be in equal

shares (805 ILCS 180/25-1(a)), regardless of any disparity in capital

contributions among the members. Thus, the only sure method of satisfying

all the clients’ unique desires and expectations is to articulate them in a written

operating agreement signed by all the members of the LLC.

The LLC form also allows for great flexibility in management, control,

and distribution of profits. Unlike the S corporation form, the LLC may have

an unlimited number of equity owners (“members” in the LLCA). While

initially the LLCA required that an LLC have no fewer than two members,

the Act was amended to permit LLCs to have a single member. 805 ILCS

180/5-1(b). All states now permit single-member LLCs. Further, the LLCA

provides that an operating agreement can include any oral, written, or implied

agreement among all members of an LLC, including a sole member. See 805

ILCS 180/1-5 (operating agreement defined). To avoid the risk of having a

court construe the unintended existence of an “operating agreement” from

some combination of notes, conversations, and implied understandings,

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counsel should advise all clients creating LLCs to adopt a written operating

agreement, even if only a very simple one.

Also, unlike the S corporation form, there are no restrictions on the types

of entities that can be members of an LLC; corporations, nonresident aliens,

partnerships, individuals, and other types of entities all can have ownership

interests in an LLC. In addition, an LLC may have more than one class of

equity interest or membership interest.

Unlike the corporate form, the LLC has no “housekeeping” corporate

formalities to follow, such as the obligation to elect officers and directors

annually or, unless otherwise specified in the operating agreement, to

memorialize meetings and corporate action with minutes, consents, and

resolutions. 805 ILCS 180/10-10(c). See §1.7 above. However other corporate

formalities, such as maintaining separate corporate accounts for an LLC’s

funds and avoiding the commingling of LLC property with the property of

members and managers, would still be necessary to avoid piercing the liability

veil. See Charles W. Murdock, BUSINESS ORGANIZATIONS §§5.11, 5.13

(2d ed. 2010) (Vol. 7 of West’s ILLINOIS PRACTICE SERIES). Although

the “housekeeping” test may not be applicable to LLCs, Illinois courts have

begun to explore whether the corporate veil of the LLC may be pierced for

other reasons. Some courts have suggested in dicta that the LLC veil may still

be pierced under the other grounds available for veil-piercing with

corporations, such as if there is unity of interest between the owners and the

corporation and if failure to pierce the veil would promote injustice. See, e.g.,

Securities Investor Protection Corp. v. R.D. Kushnir & Co., 274 B.R. 768,

775 (Bankr. N.D.Ill. 2002).

The LLCA provides that members of member-managed LLCs and

managers of manager-managed LLCs have fiduciary duties to their LLCs,

including duties of loyalty and due care. See 805 ILCS 180/15-3. Further, the

LLCA states that even a member in a manager-managed LLC may have

fiduciary duties if that member exercises managerial authority (whether or not

the member does so pursuant to any specific grant of authority in the operating

agreement). See 805 ILCS 180/15-3(g). As noted in §1.7 above, Illinois courts

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have applied expanded notions of fiduciary duties to shareholders, officers,

and directors involved in closely held corporations on the theory that these

structures are analogous to partnerships. In the LLC context, Illinois courts

have applied the precedent from Hagshenas v. Gaylord, 199 Ill.App.3d 60,

557 N.E.2d 316, 145 Ill.Dec. 546 (2d Dist. 1990), to the LLC structure as well

and have concluded that members in member-managed LLCs were analogous

to officers or directors of corporations, with analogous fiduciary duties. See

Anest v. Audino, 332 Ill.App.3d 468, 773 N.E.2d 202, 265 Ill.Dec. 840 (2d

Dist. 2002). As in the close and closely held corporation context, Illinois

courts seem to be at the forefront in their expansion of these fiduciary duty

concepts to the LLC structure. See generally Thomas M. Madden, Do

Fiduciary Duties of Managers and Members of Limited Liability Companies

Exist as with Majority Shareholders of Closely Held Corporations?, 12

Duq.Bus.L.J. 211, 238 – 241 (Summer 2010). Counsel should advise clients

considering the LLC form of the presence of these potential additional duties.

See generally Shannon Wells Stevenson, The Venture Capital Solution to the

Problem of Close Corporation Shareholder Fiduciary Duties, 51 Duke L.J.

1139 (2001).

The Professional Limited Liability Company Act, 805 ILCS 185/1, et

seq., allows professional limited liability companies (PLLCs) to be created for

any entity that is required to register with the Illinois Department of Financial

and Professional Regulation (IDFPR). A practitioner can create a PLLC by

using the form for organization of an LLC (Form LLC 5.5) and simply

ensuring that the entity name includes the required designation of PLLC status

(either the words “professional limited liability company” or the initials

“PLLC” or “P.L.L.C.”). See 805 ILCS 185/11. Entities that are currently

organized as LLCs but provide professional services that require registration

with the IDFPR may convert at no cost by filing an amendment to their articles

of organization to change their name to one that includes the required PLLC

designation. Id. For PLLCs practicing certain professions, the IDFPR requires

a separate registration and provides a detailed “Professional Limited Liability

Company New Application Checklist” on its website, available

at https://idfpr.illinois.gov/content/dam/soi/en/web/idfpr/forms/online/-248-

limited-liability-company-user-guide.pdf. The registration fee for a PLLC

with the IDFPR is $50 whether for a new PLLC or an LLC converted to a

PLLC. Id.

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The PLLCA states that the LLCA applies to PLLCs, except where

inconsistent with the PLLCA, and therefore allows lawyers to use this vehicle,

subject to the terms and conditions of the Illinois Supreme Court Rules. See

805 ILCS 180/50-45, 180/55-2, 185/10. See also §10 of the Professional

Association Act, 805 ILCS 305/0.01, et seq. S.Ct. Rules 721 and 722 permit

law firms to use the LLC and PLLC formats, as well as some other forms of

limited liability entities, and discuss certain limitations and prerequisites

relating to the availability of the LLC’s liability limitations to lawyers using

this form. See §1.6 above. As with all entity types, if the client will be using

the entity to engage in the practice of a regulated profession, counsel should

check the rules governing the corresponding profession to confirm whether

they permit practice in the type of entity selected and, if so, what restrictions

and requirements they place on the structure of the entity. See §1.20 below.

For a detailed discussion of entity selection issues applicable to lawyers, see

Thomas P. McGarry and Tony Jacob, Ch. 15, The Limitation of Liability

Through Business Forms, ATTORNEYS’ LEGAL LIABILITY (IICLE

2022).

When creating a PLLC, practitioners should be aware that the articles of

organization for some PLLCs will require that specific language (unique to

the relevant profession) be included in the articles.

Clients seeking to create LLCs or PLLCs should also be advised of the

tax ramifications of this choice, including such points as the potential tax

liability for phantom income. See §1.4 above. For example, as in the case of

general partnerships, the IRS will evaluate provisions concerning allocations

of gain and loss in the operating agreement using its “substantial economic

effect” standards. See §1.24 below. Again, this may mean that the members

will be somewhat constrained in the way they structure their allocations of

ownership interests, gain, and loss.

Also, counsel should discuss the respective statutory provisions

concerning dissociation of members of LLCs and PLLCs, and the obligations

to repurchase the interest of the dissociated members in the entity following

dissociation since these statutory provisions are not intuitive to

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businesspeople who may be used to dealing with corporations and the

presumption of easy transfer of shares. For example, the LLCA provides that

a member is dissociated from an LLC upon the occurrence of any one of

several events, including the death or bankruptcy of the member. 805 ILCS

180/35-45. Further, members who wrongfully dissociate from a member-

managed LLC are liable for damages caused by the dissociation. 805 ILCS

180/35-50(c). Once a member dissociates from an LLC, the member’s right

to participate in the management of the company’s business ceases. 805 ILCS

180/35-55(a)(1). The operating agreement may alter some, but not all, of these

provisions. See 805 ILCS 180/1-5, 180/15-5.

In 2005, Illinois authorized domestic series LLCs under the LLCA. Under

these provisions, a new Illinois LLC can be created (or an existing Illinois

LLC can be “retrofitted”) as a series LLC. Each series within a series LLC

can function as a separate unit with different members, managers, and assets.

Liabilities associated with one series will not attach to assets of any other

series within the same LLC. The “master” LLC pays one filing fee to the State

of Illinois and makes one annual filing. However, these operational

advantages come at a cost: each series must maintain separate and distinct

records, must be separately capitalized, and must segregate its assets. See

generally 805 ILCS 180/37-40. As of this publication date, not all states have

added the concept of series LLCs to their corporation codes, and the IRS has

provided only limited guidance on the tax treatment of series LLCs. Similarly,

the precedent treatment of series LLCs by bankruptcy courts is not as robust

as it could be, particularly on the question of whether the concept of limited

liability between series will survive a challenge in a bankruptcy proceeding.

So far, commentators have identified at least two possible uses for series

LLCs. One such use might be for a corporate client that wished to minimize

its annual state franchise taxes but that wanted to own several different parcels

of real estate, with a different group of equity holders investing in each

property. See generally Nick Marsico, Current Status of the Series LLC:

Illinois Series LLC Improves Upon Delaware Series LLC But Many Open

Issues Remain, 9 J. Passthrough Entities 35 (Nov./Dec. 2006); Randall H.

Borkus and Kimberly J. Myers, Series LLCs: Practical Pointers and Tax

Implications, 95 Ill.B.J. 22 (2007).

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Another possible use for a series LLC might be in a professional service

context, in which several professionals, such as doctors, could coown a series

LLC, and then different subgroups of doctors could participate in the profits

of separate offices or practice subgroups by placing them in separate series

within the LLC. Although the PLLCA does not reference series PLLCs, a

representative of the Illinois Secretary of State confirmed in an informal

conversation at the time of publication of this handbook that it is possible to

form a series PLLC.

5. [1.11] Close Corporation

Another variant of the corporate form is the close corporation, described

in Article 2A of the Business Corporation Act of 1983. See 805 ILCS 5/2A.05,

et seq. In addition to the advantages described in §1.7 above for C

corporations, the close corporation form also avoids certain formalities and

simplifies the legal requirements related to operation of the venture. For

example, shareholders of a close corporation may elect to dispense with the

board of directors entirely and manage the business directly. 805 ILCS

5/2A.45(a). Further, shareholders of a close corporation may enter into written

agreements granting themselves, individually or in groups, the power to

control most aspects of the management of the business without the risk that

the entity will be deemed a partnership. 805 ILCS 5/2A.40(a).

To qualify as a close corporation, the shareholders of the entity must agree

to have one or more of the following restrictions apply to their transfers of

corporate stock: (a) the holder must offer the corporation or the other

shareholders a right of first refusal to purchase the stock before offering it to

a third party; (b) the corporation or any other shareholder is required to

purchase the stock if the holder wishes to sell it; (c) the holder is required to

obtain the consent of the corporation or any other shareholder before

transferring stock; or (d) transfer of stock to certain persons is prohibited,

provided that this prohibition is not manifestly unreasonable. 805 ILCS

5/6.55(c), 5/1.80(s). These restrictions must appear either in the corporation’s

articles of incorporation or in an agreement entered into by all the

corporation’s shareholders. 805 ILCS 5/1.80(s). If they appear in the articles

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of incorporation or an amendment to the articles, they must be authorized by

all shareholders or, if the entity is being newly incorporated, all incorporators

and subscribers. 805 ILCS 5/2A.45(b).

The close corporation statute states that if the shareholders have elected

to eliminate the board of directors and to manage the close corporation

themselves, then the shareholders assume all fiduciary duties and liabilities of

directors with respect to the close corporation. 805 ILCS 5/2A.45(a)(4). These

same types of fiduciary duties may also be applied to shareholders of

corporations and members of limited liability companies if the structures of

these entities are analogous to statutory close corporations. See §§1.7 and 1.11

above.

D. [1.12] Joint Venture

Occasionally, some types of business entities are referred to as “joint

ventures,” and clients will often come to their lawyers with requests to set up

joint ventures for them. However, there is no such statutory entity, and a

practitioner asked to create a joint venture must obtain further information

about which type of entity the client wishes to use as the vehicle from which

this joint venture will operate. Joint ventures can be operated as partnerships,

corporations, limited liability companies, limited liability partnerships, or

limited liability limited partnerships. In what can be its simplest form, a joint

venture may consist of a single contract between two or more joint venturers.

The contract is the vehicle that allocates responsibilities, liabilities, and

income among the joint venturers. In this situation, no separate entity is

created, and the parties each bear their own risks and responsibilities relating

to performance under the contract.

In advising clients on joint ventures, the corporate attorney should discuss

the parties’ intentions as to the proposed duration of the venture. Often, joint

ventures are formed to undertake one specific transaction or project, and if

this is the parties’ intention, it may have an impact on what type of structure

would be best suited to the joint venture’s operations. Liability concerns,

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ownership interests, and control features will also suggest whether a joint

venture should be operated through one of the entities described in this

handbook or simply by means of a contract among the joint venturers.

E. [1.13] Cooperatives

The Illinois statutes have, for many years, permitted groups of individuals

to operate jointly as cooperative corporations. See Co-operative Act, 805

ILCS 310/1, et seq.; Agricultural Co-Operative Act, 805 ILCS 315/1, et seq.

That universe of entities was recently expanded in Illinois to include workers

cooperative associations by the Limited Worker Cooperative Association Act,

805 ILCS 317/1, et seq. This latter act, effective January 1, 2020, permits the

formation of worker cooperatives for the purpose of creating and maintaining

sustainable jobs and generating wealth in order to improve the quality of life

of their worker-members. Like other corporations, these cooperative entities

have articles of organization, directors, equity owners, bylaws, and essentially

the same governance attributes as other corporations. The Limited Worker

Co-operative Association Act amended the Co-operative Act to provide that

cooperative corporations may be organized under the Business Corporation

Act of 1983, the General Not for Profit Corporation Act of 1986, 805 ILCS

105/101.05, or the Limited Worker Cooperative Association Act. These

worker cooperative associations must have at least three members and they

may have only one class of members, consisting of worker-members who

manage all the affairs of the cooperative. See 805 ILCS 317/10.

F. General Considerations

1. [1.14] Number and Identity of Owners and Investors

If the number of owners and investors is large (e.g., in excess of five),

counsel should consider using the corporate or limited liability company

forms, which enable owners to centralize management, avoid termination at

the will of one owner, permit or limit transferability of ownership, and limit

liability. However, if the number of owners or investors will exceed 100, the

S corporation vehicle will not be available. Similarly, if the owners include

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nonresident aliens or statutory entities, such as corporations, LLCs, or

partnerships, then the S corporation form is not an option. If the number of

owners and investors is small and if all of them will be actively involved in

the business, then one of the partnership forms or the corporation or close

corporation form may be useful.

2. [1.15] Limited Liability

If limited liability is important, counsel should select the corporate,

limited liability company, limited liability partnership, limited partnership, or

limited liability limited partnership forms. If all owners are to benefit from

limited liability, the corporate, LLP, LLLP, LLC, or PLLC forms may be

appropriate. If some (but less than all) of the investors are willing to be liable

for the entity’s liabilities, then the limited partnership model may be useful;

however, in most cases in which the limited partnership model fits the

transaction, the LLC or the LLLP model will also fit and will provide the

added benefit of limited liability for all investors. If liability concerns are

especially high, insurance should be considered in any case, and it might be

especially important for each general partner in a partnership. If loans from

outside parties (e.g., banks or finance companies) are likely, some of the

limited liability advantages of the corporate form may disappear because

outside lenders often require personal guarantees from investors in start-up

businesses.

As noted in §1.7 above, the limited liability afforded by the corporate

form comes at a price: the corporation must observe corporate formalities,

segregate its assets, and generally transact business (and document those

transactions) in a manner consistent with the separate legal existence of the

corporation as an entity independent from its owners, officers, and directors.

Traditionally, the LLC has been seen as a form that affords the same liability

limitations without the need to observe quite as many corporate formalities

(although the entity still has annual filing requirements and still must

segregate its assets and behave as a separate entity). The terms of the operating

agreement may require formalities as extensive as those required for a

corporation (if, for example, the members had voting rights over several types

of corporate transactions). Also, if the LLC is a series LLC, the entity will

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need to observe significant corporate formalities, and significant

documentation requirements will arise in connection with the maintenance of

the separation of each series in the LLC. See §1.10 above.

The investors, in an agreement among themselves, may alter the liability

allocations in the statutes creating the entity they select. Such a contractual

allocation will not bind third parties, but it can help shift risks among investors

when that is required. For example, some law firms hesitated to elect LLP

status because of a concern that their managing partners might be unfairly

found liable for the malpractice of any other attorney at the firm solely

because the entire firm was deemed to be under the “direct supervision and

control” of the managing partner by virtue of his or her title. In this case, the

partners at the firm could agree in their partnership agreement to indemnify

the managing partner if he or she were found liable in such a case solely by

virtue of his or her role as managing partner.

For a time, some Illinois caselaw created a concern that the liability shield

provided to members and managers of LLCs was broader than that typically

provided to officers, directors, and shareholders of corporations. See, e.g.,

Carollo v. Irwin, 2011 IL App (1st) 102765, 959 N.E.2d 77, 355 Ill.Dec. 49;

Dass v. Yale, 2013 IL App (1st) 122520, 3 N.E.3d 858, 378 Ill.Dec. 293. The

legislature has attempted to remove this inconsistency by amending the

problematic provision of the Limited Liability Company Act. See 805 ILCS

180/10-10(a-5).

3. [1.16] Tax Considerations

The client should consult a tax adviser or accountant concerning the tax

effects and desired tax consequences of the various structures suggested. In

general, if losses are expected, a partnership, S corporation, or limited liability

company may be advisable to allow the owners to offset the losses of the

business against their income from other sources.

In 1997, the IRS greatly simplified several tax regulations concerning

entity classification by adopting regulations that are often called the “check-

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the-box” regulations. See Treas.Reg. §301.7701-1, et seq. Under this

regulatory scheme, a domestic unincorporated entity with multiple owners

(i.e., a partnership or an LLC) may choose to be taxed either as a C corporation

or as a pass-through entity, and a domestic entity with a single individual

owner may choose to be treated as a “disregarded entity” (i.e., a sole

proprietorship), as an S corporation (if it qualifies for and elects this status),

or as a C corporation. See §1.46 below. These regulations are called the

“check-the-box” regulations because the form by which an entity may elect

one of these classifications simply involves checking a box. In order to qualify

for a particular entity classification, entities are no longer required to meet

substantive tests concerning their structures and operational characteristics.

This election is made by filing IRS Form 8832, Entity Classification Election.

Virtually all federal tax forms, including Form 8832, may be obtained at

www.irs.gov.

Clients also should be advised to consult their tax planners concerning the

possibility of reducing certain social security taxes through careful selection

of the entity type. In some cases, individual owners may be able to reduce

their social security tax liability by using a corporate structure and taking

money out of the entity in the form of salary, as opposed to using a partnership

structure and taking money out of the entity in the form of partnership

distributions. Similarly, “LLC distributions, unless structured properly

pursuant to its operating agreement are generally subject to self-employment

tax, whereas dividends paid by S Corporations are not.” Richard M. Colombik

and Randall H. Borkus, Advantageous Uses of LLCs, 18 Couns., No. 3, 1, 2

(May 2004).

As a result of the implementation of the Bipartisan Budget Act of 2015,

Pub.L. No. 114-74, 129 Stat. 583, the manner in which partnerships, S

corporations, and LLCs (to the extent they elect to be taxed like partnerships)

interact with the IRS has changed significantly. Previously, each of those

pass-through tax entities selected a “tax matters partner”; that individual

would be the contact person for audits and other interactions with the IRS.

However, the tax matters partner did not have authority to bind the entity or

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the individuals solely by virtue of holding that position. Further, in the case

of an audit, tax liability attached to the individuals who were equity owners in

the year in question.

The Bipartisan Budget Act has, instead, provided that each of these

entities must select a “partnership representative,” an individual who has

complete authority to bind the entity and the individual owners in dealings

with the IRS. Further, the Act provides that if an audit finds added tax liability,

that liability attaches to the entity (and thus to the equity owners as of the date

of the finding, not as of the year under audit).

Practitioners who are using template forms from the files should be aware

that prior organizational documents for these types of pass-through tax entities

usually included a very simple provision specifying who the tax matters

partner was and how replacements would be chosen. Now, however, counsel

should advise these types of clients to include greater detail on when and how

the partnership representative will be authorized to bind the entity and how

audit liability for prior years will be assessed against members. The sample

partnership agreement included in §1.80 below includes an example of this

type of language.

4. [1.17] Management

As the number of owners increases, the importance of having an

organized and centralized system of management increases. In general, the

corporate form provides the best vehicle for organizing a central management

group. Although a partnership agreement may purport to set out specific

duties for specific partners, each general partner in a general partnership, a

limited liability partnership, or a limited liability limited partnership is an

agent of the partnership with authority to bind the partnership as against third

parties. Limited partners in a limited partnership do not possess this authority.

See 805 ILCS 215/302. Thus, a limited partnership effectively centralizes

management in the general partners. The LLLP form includes a similar

centralization of management authority.

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The Business Corporation Act of 1983 creates a different structure

vesting management of a corporation in its board of directors, which is elected

by the shareholders, the directors in turn select officers to manage day-to-day

affairs. 805 ILCS 5/8.05(a), 5/8.50. This centralization of management can be

described in more detail (including job descriptions for specific officers) in

the bylaws of the corporation. See §1.82 below for a sample form of corporate

bylaws. Although the shareholders of a corporation retain the ownership of

the venture, they do not have power to bind the corporation. The limited

liability company form provides flexibility in management; it can be

centralized in the hands of managers or dispersed more widely in the hands of

the members.

5. [1.18] Transferability of Ownership

In general, shares of a corporation are more liquid and more easily

transferable than interests in the other entities described in this handbook.

However, when small businesses with relatively few owners are involved, this

factor is not significant since, regardless of the form of the entity, the

ownership interests will usually be fairly illiquid and, as a practical matter,

difficult to sell to third parties who were not involved in the business from the

outset. As noted in §1.8 above, the IRS imposes restrictions on who can be a

shareholder of an S corporation. This effectively means that S corporation

shares are somewhat less transferable. There is no statutory prohibition on

transfer of shares of an S corporation to an individual or entity excluded under

the Internal Revenue Code, but such a transfer would result in the loss of the

S status, which would likely have significant adverse tax consequences to the

shareholders and the corporation.

In terms of adding new equity owners, in a general partnership, admission

of a new partner requires consent of all other partners (see 805 ILCS

206/401(i)), although the partners could agree otherwise in a partnership

agreement. Similarly, in a limited partnership, admission of a new partner

requires the consent of all other partners, unless the admission is the result of

a merger or other conversion or unless the partnership agreement provides

otherwise. See 805 ILCS 215/301. In a corporation, the board of directors has

the power to decide whether to sell shares to new shareholders, provided that

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the articles of incorporation have authorized the issuance of more shares than

are presently outstanding and provided there are no other restrictions on their

authority (such as a shareholders’ agreement). See generally 805 ILCS 5/6.05,

5/6.25, 5/7.71, 5/8.05. The Limited Liability Company Act follows the

partnership template here and states that admission of new members of an

LLC requires unanimous consent of the existing members, although the

operating agreement can alter that requirement. See 805 ILCS 180/10-1,

180/15-5.

6. [1.19] Estate Planning

In general, a corporation or a limited liability company provides more

flexibility for estate planning because it offers the possibility of different

classes and types of stock or membership interests.

7. [1.20] Professional Regulation

Before selecting any form of entity for a client wishing to use the entity

to engage in the practice of a regulated profession (e.g., law, medicine,

dentistry, accounting, engineering, architecture, etc.), counsel should consult

the statutes and regulations governing this profession. Even entity forms like

the limited liability partnership that seem ideally suited for professional

groups may not be permissible forms in which to engage in group practice of

a profession.

Some of the statutes and rules regulating these professions include the

Illinois Public Accounting Act, 225 ILCS 450/0.01, et seq.; the Illinois

Architecture Practice Act of 1989, 225 ILCS 305/1, et seq.; the Professional

Engineering Practice Act of 1989, 225 ILCS 325/1, et seq.; the Structural

Engineering Practice Act of 1989, 225 ILCS 340/1, et seq.; the Medical

Practice Act of 1987, 225 ILCS 60/1, et seq.; the Medical Corporation Act,

805 ILCS 15/1, et seq.; the Podiatric Medical Practice Act of 1987, 225 ILCS

100/1, et seq.; the Illinois Dental Practice Act, 225 ILCS 25/1, et seq.; the

Illinois Optometric Practice Act of 1987, 225 ILCS 80/1, et seq.; and S.Ct.

Rules 721 and 722 (attorneys). Practitioners should also consult the portions

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of the Illinois Administrative Code relating to these and other professions, as

applicable. As noted in §1.10 above, for a detailed discussion of entity

selection issues applicable to lawyers, see Thomas P. McGarry and Tony

Jacob, Ch. 15, The Limitation of Liability Through Business Forms,

ATTORNEYS’ LEGAL LIABILITY (IICLE

, 2022).

8. [1.21] Continuity of Ownership and Management

Absent contrary provisions in the partnership agreement, a general

partnership automatically dissolves upon certain events, including the death

or bankruptcy of a partner. By contrast, a corporation is a separate legal entity

that continues notwithstanding the death or departure of some or all of its

shareholders. A limited partnership is not dissolved by the death of a limited

partner, and a limited partner may not compel dissolution of the partnership

absent contrary provisions in the partnership agreement.

9. [1.22] Costs; Flexibility for Future Transactions

Sole proprietorships have no formation costs aside from minimal fees

($50) and publication costs to register the use of an assumed name (if one is

used). Filing fees concerning limited partnerships are set out at 805 ILCS

215/1302 and include a fee to register an assumed name (if one is used) and a

filing fee for the certificate of limited partnership. Clients will probably need

to incur some legal fees in creating any type of partnership in connection with

the drafting of the partnership agreement. In partnerships with complicated

ownership and management features, preparation of the partnership

agreement can be a costly and time-consuming task, and clients should be

alerted to this fact.

Formation of a corporation can be more costly. The fees associated with

this entity are listed in Article 15 of the Business Corporation Act of 1983

(805 ILCS 5/15.05, et seq.) and include an initial fee for filing the articles of

incorporation, as well as license fees and franchise taxes associated with the

incorporation. 805 ILCS 5/15.10. A portion of that annual franchise tax is

based on the paid-in capital of the corporation (as defined, in a unique way,

by the Illinois Secretary of State’s office). That provision of the statute has

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been amended to reduce the capital-based franchise tax over time. Since

December 31, 2021, the first $1,000 of the calculated amount of capital-based

franchise tax is exempted. See 805 ILCS 5/15.35 (regarding domestic

corporations), 5/15.65 (regarding foreign corporations). In other words, if the

formula for franchise tax yields a number of $1,000 or less, no franchise tax

is payable. If the calculation yields a number above $1,000, the entity’s

franchise tax equals that excess.

Incorporation also will involve paying nominal fees with the relevant

recorder to record the articles of incorporation, as well as the legal fees

associated with the preparation of articles of incorporation, bylaws, pre-

organization subscription agreements, minutes, or consents for the initial

meetings of directors and shareholders, and (perhaps most significantly in

terms of legal fees because of its potential complexity) the buy-sell agreement.

See §§1.49 – 1.54 below. In addition, a corporation may incur added legal

fees if it asks its counsel to prepare annual reports and minutes or consents for

annual meetings of directors and shareholders. As noted in §1.7 above,

corporations must also observe corporate formalities, such as holding and

documenting annual meetings of directors and shareholders, and these

formalities will necessarily involve some additional expense in use of staff

time or lawyer time or both. However, even entities that do not have these

extensive statutory requirements for corporate formalities, such as

partnerships and limited liability companies, may find themselves

documenting meetings and adopting resolutions anyway, either because their

organizational documents require it or because third parties refuse to proceed

without receiving the same types of certified resolutions and incumbency

certificates that they have been accustomed to receiving in corporate

transactions.

Fees associated with creating LLCs are similar and are set out at 805 ILCS

180/50-10(b). In addition, although not required by statute, an LLC is strongly

advised to create an operating agreement that governs the day-to-day

operations, management, and income distribution aspects of the LLC. Again,

legal fees to draft this agreement can be high, depending on the complexity of

the arrangements that the clients wish to put in place.

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Current information on filing fees usually can be found on the respective

websites of the filing offices. Thus, information on fees and forms for filing

an assumed name for a sole proprietorship, a general partnership, or a

professional service corporation usually can be found on the websites for the

counties in which these filings must be made. See, e.g.,

www.cookcountyclerk.com. Information on filing fees and forms for

corporations, partnerships of all types, and LLCs can be found on the Illinois

Secretary of State’s website, www.cyberdriveillinois.com.

When no single form of entity is most clearly applicable, an LLC or a

partnership initially may be a logical choice. In general, an LLC or a

partnership can be changed to a corporation with no tax effect. See generally

26 U.S.C. §351. By contrast, adverse tax consequences often arise when a

business is being converted from a corporation to a partnership or an LLC.

However, the ease of conversion or merger of these various entity types

should be examined in some detail if the client is considering these

transactions in the future. The Entity Omnibus Act, 805 ILCS 415/101, et seq.,

addresses the process for conversions and domestications of corporations,

general partnerships, limited liability partnerships, limited partnerships,

limited liability limited partnerships, and LLCs.

As a matter of statutory permissibility and compliance, these types of

mergers and conversions among partnership, corporate, and LLC structures

are fairly easy to accomplish. However, while the tax ramifications of a

merger of an S corporation and an LLC (or the conversion of one such entity

into the other) may not be significant, mergers and conversions between other

types of entities can sometimes have adverse tax consequences to the

participants. For example, in the case of a merger of an LLC and a C

corporation, the C corporation will be deemed to have been liquidated as part

of the merger transaction for federal income tax purposes.

The statutes discussing mergers and conversions involving general and

limited partnerships do not address the potential tax effects of these

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transactions. As with all tax-related matters, clients should be urged to consult

with tax advisors to obtain meaningful advice based on their particular facts

and circumstances.

IV. ORGANIZING THE BUSINESS ENTITY

A. [1.23] Sole Proprietorship

Virtually no organizational steps are necessary to form a sole

proprietorship. All contracts and agreements are signed by the sole proprietor

personally, and any permits or licenses that may be required are obtained in

the name of the sole proprietor. If the proprietor intends to use an assumed

name for the business rather than his or her personal name, an assumed name

filing is required under the Assumed Business Name Act, 805 ILCS 405/0.01,

et seq.

An assumed name filing involves a filing with the relevant county clerk

and publication in a local paper of the assumed name being used, as well as

the real name of the person or entity using the name. Use of an assumed name

without completing the necessary filing is a Class C misdemeanor with

accompanying civil liability. 805 ILCS 405/5, 405/6. The form of application

to use an assumed name in Cook County and the text of the legal notice that

must be published in connection with it may be found at the website for the

Cook County Clerk, www.cookcountyclerk.com. For forms for use in other

counties in Illinois, practitioners should consult the appropriate websites or

check with the applicable recorder’s office.

B. Partnership

1. [1.24] General Partnership

A general partnership is not required to make any filing with the State of

Illinois in connection with its creation. To the extent that the partnership

selects a name that is something other than the names of the partners, an

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assumed name filing would be appropriate. See §1.23 above. However, if the

partnership is conducting business in a regulated industry (e.g., law or

medicine) the applicable professional rules may prohibit certain types of

assumed names. See §1.20 above. Importantly, even though not required by

law, the partners probably will want a formal written partnership agreement

to memorialize their understanding and avoid future disputes. Generally, these

agreements will address questions involving capital contributions, return of

capital, sharing of profits and losses, participating in management, withdrawal

from the partnership, and termination of the venture. A relatively simple

sample form of a general partnership agreement is included in §1.80 below.

Additional points that might be included in a partnership agreement can be

found in the discussion of buy-sell agreements in §§1.49 – 1.54 below and in

the sample form of bylaws in §1.82 below.

The partnership agreement will need to specify how the partnership’s

profit and loss will be allocated among the partners. In general, the partners

are free to structure this arrangement however they wish. However, the IRS

will override any structure if it finds that the allocations do not have

“substantial economic effect.” 26 U.S.C. §704(b). Briefly, the Treasury

Regulations promulgated under §704(b) provide that allocations among

partners will have “economic effect” if the partnership includes the following

concepts in its discussion of allocations: (a) the allocation is reflected as an

increase or decrease in each partner’s capital account, maintained on the books

and records of the partnership; (b) liquidation proceeds are, throughout the

term of the partnership, distributed in accordance with the partners’ positive

capital account balances; and (c) any partner with a deficit balance in its

capital account following the distribution of liquidation proceeds is required

to restore the amount of this deficit to the partnership, and the restored amount

is then either distributed to the partners in accordance with their positive

capital account balances or paid to creditors. See Treas.Reg. §1.704-1(b)(2).

Many partnership agreements clearly state that a partner is not required to

restore a deficit in its capital account, and often partners are insistent on this

protection. The mere fact that a partner is not required to restore a deficit in

its capital account will not, by itself, cause an allocation to lack economic

effect. Some regulatory “safe harbors” do exist. Id.

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The Treasury Regulations promulgated under Code §704(b) also state that

an economic effect will be “substantial” if there is a reasonable possibility that

the allocation will substantially affect the dollar amounts to be received by the

partners, independent of the tax consequences. Treas.Reg. §1.704-1(b)(2)(iii).

If the allocations have substantial economic effect and if they do not violate

any other tax law requirements, these allocations will control the manner in

which income or loss of the partnership is taxable to or deductible by the

partners. If the IRS or a reviewing court determines that the allocations do not

have substantial economic effect, the allocations will be disregarded, and the

partners will be taxed according to the “partners’ interest in the partnership”

as determined by the IRS or the reviewing court. Treas.Reg. §1.704-

1(b)(2)(iv)(i). Because of the complex nature of the regulations on substantial

economic effect, counsel should consult with tax experts (including the

individual who will be the tax accountant for the new entity) when drafting

these provisions of the partnership agreement.

2. [1.25] Limited Partnership

Formation of a limited partnership should include the same items

discussed in §1.24 above for a general partnership for the same reasons. In

addition, however, the Uniform Limited Partnership Act (2001) requires that

the partners must sign and file a certificate of limited partnership containing

basic information about the partnership. See 805 ILCS 215/201(a). The

corresponding form for ULPA (2001) is designated Form LP 201, Certificate

of Limited Partnership, and is available at the Secretary of State’s website,

www.cyberdriveillinois.com. The certificate takes effect and the limited

partnership comes into existence upon the filing of this certificate with the

Secretary of State or, if specified in the certificate, on a date up to 90 days

following the filing. See 805 ILCS 215/201(c), 215/206(c).

The certificate includes information about the purposes and name of the

partnership, the names and addresses of each general partner, the aggregate

amount of cash and descriptions of other property contributed by the partners

to the partnership, as well as any other information the partners may elect to

include concerning the partnership. See 805 ILCS 215/201(a). The name of

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the partnership must contain the words “Limited Partnership” or the

abbreviation “L.P.” but may not include the words “Corporation,”

“Incorporated,” “Company,” or any abbreviations of them. See 805 ILCS

215/108(e). If the limited partnership plans on doing business under an

assumed name, it would apply for authority to do so by making a filing with

the Secretary of State’s Office. See 805 ILCS 215/108.5. That filing is made

on Form LP 108.5, Application to Adopt, Change or Cancel Assumed Name.

Practitioners should also alert clients to the fact that compliance with

ULPA (2001) concerning a limited partnership’s name does not eliminate the

need to consider other types of intellectual property registration. See 805

ILCS 215/108(g). See §1.48 below.

The partnership must designate a registered agent (805 ILCS 215/114),

and it may elect to operate under an assumed name if it complies with the

requirements of 805 ILCS 215/108.5. The Illinois forms for limited

partnerships may be reviewed and downloaded from the Secretary of State’s

website. As noted in §1.1 above, it is preferable, when possible, to obtain all

forms from the official governmental websites in order to ensure that the

current version of the form in question is being used.

Limited partnerships should also consider documenting the agreements

among the partners in a partnership agreement, especially to the extent they

are not included in the certificate of limited partnership. Such an agreement

would be much like a general partnership agreement but would include a

recital of the limited status, liability, and involvement of the limited partners.

Also, counsel should advise clients of securities law concerns raised by a sale

of limited partnership interests, which can be deemed to be “securities” for

those purposes. See §§1.55 – 1.65 below. As in the case of the general

partnership, the discussion of allocations of income and loss in the limited

partnership’s partnership agreement will be subject to the IRS’s rules on

“substantial economic effect.” See §1.24 above.

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3. [1.26] Limited Liability Partnership and Limited Liability

Limited Partnership

As noted in §1.6 above, no entity can be created as a limited liability

partnership. Rather, the entity must first organize as a general partnership and

then elect LLP status pursuant to the LLP statutes that are included within the

framework of the Uniform Partnership Act (1997). See 805 ILCS 206/1001.

As noted in §1.24 above, creation of a general partnership does not require

any filing with the state, although the partners are well advised to consider

negotiating a written partnership agreement to deal with the rights and duties

of the partners. After creation of the general partnership, the partners must file

Form UPA-1001, Illinois Uniform Partnership Act Statement of

Qualification, with the Secretary of State in order to register as an LLP. This

form requires basic information about the entity, including the partnership

name, federal employer identification number, registered agent, registered

office, statement of purpose, and number of partners. A copy of Form UPA-

1001 can be found on the Illinois Secretary of State’s website,

www.cyberdriveillinois.com. Both domestic and foreign LLPs must file

annual renewal statements as well. 805 ILCS 206/1003(a). The name of the

LLP must include as its last words or letters one of the following: “Registered

Limited Liability Partnership,” “Limited Liability Partnership,” “R.L.L.P.,”

“L.L.P.,” “RLLP,” or “LLP.” 805 ILCS 206/1002.

Similarly, an LLLP must organize under the Uniform Limited Partnership

Act (2001) and, within that statutory framework, elect LLLP status by

checking the appropriate box on the certificate of limited partnership form.

See 805 ILCS 215/201(a)(4). The name of the LLLP must include the phrase

“limited liability limited partnership” or the abbreviation “LLLP” or

“L.L.L.P.” and may not contain the abbreviation “L.P.” or “LP.” See 805

ILCS 215/108(c).

With the advent of these new entities, counsel will need to read entity

names quite carefully when dealing with LPs, LLPs, and LLLPs, because the

number of “L”s may signify a material difference in the liability of the entity’s

partners.

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C. C Corporation

1. [1.27] Selecting the State of Incorporation

A corporation is a creature of law. Thus, selecting the state of

incorporation should involve examining where the corporation will be doing

its business. In order to do business in a state, a corporation either must be

incorporated under the state’s laws or must be incorporated elsewhere and be

qualified to do business under the state’s laws.

If two or more individuals purport to act together as a corporation in

Illinois without incorporating under the Business Corporation Act of 1983,

they have effectively formed a general partnership and are jointly and

severally liable for the obligations they purport to incur on behalf of the entity.

805 ILCS 5/3.20. If a corporation from another state attempts to transact

business in Illinois without qualifying as a foreign corporation, it may not

maintain a civil action in any Illinois court until it qualifies to transact business

here and pays all required fees, which would typically include fees for all

years in which the entity transacted business in Illinois prior to qualifying,

plus penalties. A foreign corporation that has not qualified to do business in

Illinois may, nonetheless, defend itself in litigation brought against it in

Illinois courts, even if the corporation should have qualified to do business

here previously. 805 ILCS 5/13.70.

The BCA provides some guidance as to what constitutes “doing business”

in the State of Illinois for purposes of deciding whether a corporation from

another state needs to qualify as a foreign corporation in Illinois. 805 ILCS

5/13.75 affirms that an entity that only performs certain minor, ministerial

tasks within the State of Illinois will not be deemed to be transacting business

here for purposes of the BCA. These minor activities include maintaining or

defending a lawsuit in Illinois courts, maintaining bank accounts in Illinois,

holding directors’ or shareholders’ meetings in the state, and owning (without

more) real or personal property in Illinois.

If the business is or will be headquartered and conducted in Illinois,

normally there will be no compelling reason for incorporating in another state.

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Historically, the Delaware business corporation law was more “pro-

management” and flexible than the laws of other states. As a result, many

entities were incorporated in Delaware and then simply qualified as foreign

corporations in the states in which they intended to conduct their business.

There are still some ways in which the Delaware law is more flexible, but

in general, in Illinois, the BCA has been amended over the years to make it

easy to work with from the company’s and the practitioner’s perspectives.

This conclusion is particularly applicable to small, closely held corporations

because most of the pro-management provisions in the Delaware law are

aimed at corporations that have publicly traded (or at least widely held) stock.

In addition, the costs of incorporating elsewhere and qualifying in Illinois

should be considered; basically, the corporation will pay two sets of franchise

taxes each year, and the Illinois fees probably will be the same whether the

company is an Illinois corporation or simply a Delaware corporation qualified

to do business in Illinois.

Sections 1.28 – 1.41 below discuss the principal steps to form an Illinois

corporation. Although the steps will be very similar, practitioners who are

incorporating in another state should examine the business corporation law of

that state to confirm that the forms have similar names and that the specific

requirements are consistent. To avoid traps for the unwary (and to avoid

unpleasant allegations of unauthorized practice of law in other jurisdictions),

practitioners also should generally seek the advice of local counsel when

asked to form an entity under the laws of any jurisdiction in which they are

not licensed.

2. [1.28] Incorporators

A corporation may be organized under the Business Corporation Act of

1983 by one or more incorporators who must be either corporations or persons

of at least 18 years of age. 805 ILCS 5/2.05(a). The incorporators do not need

to be the initial shareholders of the corporation. Thus, an attorney may

incorporate on behalf of a client.

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The incorporators must select the name for the corporation as well. The

BCA requires that the name of a corporation must contain the words

“Corporation,” “Company,” “Incorporated,” or “Limited,” or an abbreviation

of one of those words. 805 ILCS 5/4.05(a)(1). In addition, the name must not

contain any word or phrase that suggests that the corporation engages in a

business that requires incorporation under a special statute. These include the

words “Bank,” “Banker,” “Banking,” “Trust,” “Pawner,” or “Cooperative,”

as well as words suggesting involvement in the insurance or railway

businesses. 805 ILCS 5/4.05(a)(2), 5/4.05(a)(4). Further, the name must be

“distinguishable” on the Secretary of State’s records from the names of all

other existing Illinois and foreign corporations authorized to do business in

Illinois. 805 ILCS 5/4.05(a)(3).

To determine the existence of entities with names that may be deemed

“indistinguishable” from a client’s chosen name for a new entity, counsel

should contact the Secretary of State’s Department of Business Services, as

well as the relevant recorder’s office. In addition, it may be prudent to reserve

a name for use by the corporation, especially if the client feels strongly about

using a particular name. This can be done using Form BCA 4.10, Application

for Reservation of Name, and paying a small filing fee. The name will then be

reserved for a period of 90 days, and this reservation may be renewed. A copy

of Form BCA 4.10 may be found on the Secretary of State’s website,

www.cyberdriveillinois.com.

The Secretary of State’s website also provides a mechanism by which

counsel may perform an informal search to determine whether any existing

corporations are using names similar to one that a client wishes to use.

Although this search will not provide a conclusive answer as to whether the

Secretary of State’s office will determine that a proposed new name is

indistinguishable from an existing one, it is a helpful tool when advising

clients. Also, counsel must remember that unless a name reservation has been

filed and accepted by the Secretary of State’s office, other incorporators are

free to use the name if they are the first to file articles of incorporation or a

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name reservation form for this name. As noted in §1.48 below, compliance

with state name-clearance statutes does not remove the need to consider

federal trademark searches and trademark registration.

3. [1.29] Subscriptions for Shares; Pre-Organization

Subscriptions

A written subscription agreement is advisable but not essential. Such an

agreement serves primarily as a device to bind the subscribers to their

agreement to pay a stated consideration for a stated number of shares. In

addition, such an agreement can be useful to memorialize the financial and

management structure of the entity, as well as key provisions of the articles of

incorporation and bylaws and the terms of employment agreements and buy-

sell agreements.

Often, it will be useful to obtain subscription agreements from investors

in advance of the incorporation of the entity so that the organizers can be

certain that their efforts and expense to create the entity will not be in vain.

Not all persons who are to be shareholders need to sign these pre-organization

subscription agreements, but it is advisable because of the exemptions from

registration contained in the Illinois Securities Law of 1953, 815 ILCS 5/1, et

seq. Subscriptions for shares are irrevocable for six months unless otherwise

provided in the subscription agreement, and the filing of the articles of

incorporation constitutes acceptance of all subscriptions. 805 ILCS 5/6.20.

Following incorporation, these subscriptions are payable at any time upon

demand by the board of directors. A sample form of a pre-organization

subscription agreement is included in §1.81 below.

4. [1.30] Articles of Incorporation

The articles of incorporation should be submitted on Form BCA 2.10,

Articles of Incorporation, or a form that complies with the requirements of the

statute. Since the COVID-19 pandemic, the Illinois Secretary of State’s office

(like many others) has moved more and more to favor online filings. If filed

by paper, the filing must be submitted in duplicate and all signatures must be

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in black ink, a requirement that has tripped up many careful counsel. Sections

1.31 – 1.35 below discuss some of the significant portions of the articles of

incorporation. A copy of Form BCA 2.10 may be found on, and may also be

filed directly online through, the Illinois Secretary of State’s website,

www.cyberdriveillinois.com.

a. [1.31] Registered Agent and Office

The registered agent receives service of process when the corporation is

sued. In addition, the registered agent receives all correspondence from the

Department of Business Services and other agencies. The agent must be a

resident of Illinois, and the address given must be a street address or rural

route number (not a post office box) in Illinois that is identical with the

business office of the registered agent. 805 ILCS 5/5.05(c).

For an annual fee, a corporation can hire one of several service companies

to serve as its registered agent. As an alternative, some attorneys prefer to

serve as agent for their clients to ensure that they are kept apprised of any

litigation involving the client and that they receive notice of any filing

deficiencies from the Secretary of State. A client may wish to save money by

serving as its own registered agent. This is permitted, but counsel should

caution the client that it must monitor the mail particularly closely if it is going

to be its own registered agent. A corporation that receives a high volume of

mail or one that does not have a well-organized office would be well advised

to consider an alternative registered agent; the assurance that important

notices will not be lost may be valuable enough to justify any added cost.

b. [1.32] Purposes for Which Corporation Is Organized

The Business Corporation Act of 1983 provides that corporations may be

organized for any lawful purposes except for the purposes of banking or

insurance (because these types of entities are regulated by other Illinois

statutes). 805 ILCS 5/3.05. As noted in the discussions of the corporate name

in §1.28 above, the purpose clause should omit any words that suggest that

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the corporation will engage in a regulated business. Although the purpose may

be specific, it is sufficient and usually advisable to include the following

general-purpose clause:

The transaction of all or any lawful business for which corporations may

be incorporated under the Illinois Business Corporation Act of 1983.

This phrase incorporates language from 805 ILCS 5/3.05 concerning

permissible corporate purposes, and it is conveniently preprinted on the

Secretary of State’s form. It is advisable not to vary from it too much if one is

including a broad purpose clause in articles of incorporation. Further, if the

entity is being organized to engage in the practice of a regulated profession,

counsel should consult the corresponding statutes and regulations governing

the profession as they often require that specific language relating to the

particular profession be included in the statement of corporate purpose. See

the discussion of professional regulation in §1.20 above.

c. [1.33] Authorized and Issued Shares; Consideration Received

One or more classes of stock may be authorized, but by statute each share,

regardless of class, is entitled to one vote on each matter submitted to a vote

at a meeting of shareholders. 805 ILCS 5/7.40(a). However, in its articles of

incorporation or in an amendment to them, a corporation may limit or deny

voting rights or provide special voting rights to any class or series of shares.

805 ILCS 5/7.40(b). Absent a contrary indication in the articles of

incorporation, shareholders have cumulative voting rights in elections of

directors. 805 ILCS 5/7.40(a). These rights permit each shareholder to

multiply the number of shares owned by the number of directors to be elected

and to distribute the total votes among one or more of the nominees.

Shareholders have no preemptive rights unless these rights are specifically

provided in the articles of incorporation. 805 ILCS 5/6.50(a). In general, a

corporation whose shareholders have preemptive rights may not issue and sell

shares to others without first offering them to its shareholders so that the

shareholders may maintain their proportionate ownership of the corporation’s

shares. See 805 ILCS 5/6.50(c). The presumptions concerning cumulative

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voting and preemptive rights have shifted over the years, and these rules apply

only for corporations organized after December 31, 1981. See 805 ILCS

5/6.50(a), 5/7.40(b). When reviewing the articles of incorporation of older

corporations, it is important to review the status of prior law to verify when

silence in the articles of incorporation was deemed to be a grant of these rights

and when an affirmative statement was needed.

The Business Corporation Act of 1983 permits stock to have a stated par

value or to be issued as no-par stock. In order to qualify as being fully paid

and nonassessable, stock should not be issued for a consideration less than the

par value (although 805 ILCS 5/6.30 implies that this is not an absolute

requirement). If a par value is to be set, it is advisable to set the par value

considerably lower than the consideration per share to be received initially,

especially if losses are anticipated at the outset. This will enable the

corporation to issue shares to additional investors even if the initial losses

mean that the additional investors are not willing to pay what the initial

investors paid. Stock could be issued at ten dollars per share initially, but its

par value might be only one dollar per share. Then, at a later date, if a new

investor appears who is willing to buy stock, but only at five dollars per share

because of initial losses, the corporation could issue the stock at five dollars

per share and that stock would still be fully paid and nonassessable because

its par value is only one dollar.

If a corporation is going to issue no-par stock, each resolution of the board

of directors that authorizes issuance of stock must confirm the amount

allocated to the corporation’s paid-in capital in connection with the issuance.

If the board has deemed the amount received to be sufficient, the board should

also confirm by resolution that the no-par shares so issued are fully paid and

nonassessable. This process is consistent with 805 ILCS 5/6.30.

Stock may be issued for cash or for services, in-kind contributions of

tangible or intangible property, or labor or services actually performed for the

corporation. When the consideration for stock is something other than cash,

the board of directors or the shareholders, as the case may be, shall value the

consideration received, and their judgment shall be conclusive. 805 ILCS

5/6.30. Thus, when in-kind contributions or promissory notes are received for

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LLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 1 — 61

stock, it is advisable to have the board of directors (or shareholders, if

applicable) pass a resolution accepting and valuing the consideration. If the

in-kind consideration received has been deemed complete and sufficient, the

resolution should also affirm that the shares so issued are fully paid and

nonassessable.

If a corporation will have classes or series of stock, or if there are any

other special designations, preferences, qualifications, limitations,

restrictions, or special or relative rights concerning any class or series of stock,

these provisions must be included in the articles of incorporation. 805 ILCS

5/2.10(a). However, as noted in §1.8 above, if a corporation is going to elect

S status, it may not have multiple classes of stock.

Corporations often create preferred classes of stock as a way to ensure

that certain investors are given preferential rights to dividends and liquidation

distributions or that they are guaranteed a certain minimum dividend each

year. Nonvoting classes of stock (whether preferred or common) are also

useful if certain investors expect to contribute funds to a corporation but do

not expect or, in some cases, do not want to be given, a vote in any corporate

affairs. Clients may want to consider using preferred stock as an estate

planning device. Also, some investors may prefer debt instruments with a

fixed schedule of repayment but with a right to convert into stock. In addition,

multiple classes of stock can help distribute voting control and economic

interests in more flexible ways.

d. [1.34] Directors

The initial directors may be listed in the articles of incorporation, but such

a listing is not required. The board may consist of one or more members, as

fixed by the bylaws of the corporation. 805 ILCS 5/8.10(a). The bylaws may

also set a range for the size of the board, allowing it to vary without further

amendment. 805 ILCS 5/8.10(b). Privacy concerns usually dictate that this

information is not listed in the articles of incorporation; however, clients

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should be alerted to the fact that a corporation’s directors must be disclosed

eventually when the corporation begins filing annual reports with the

Secretary of State.

e. [1.35] Allocation Factor

Illinois corporations must pay an annual franchise tax for the privilege of

exercising their business activities in the state. A portion of this tax is based

on the corporation’s paid-in capital. See §1.22 above. In their articles of

incorporation, corporations have the option of including an allocation factor

to be applied to their paid-in capital when calculating their franchise taxes.

Corporations doing business in states other than or in addition to Illinois may

proportionately reduce their annual franchise tax on the basis of the amount

of the corporation’s business transacted at or from locations in Illinois and the

value of property owned in Illinois, as a percentage of the corporation’s

business and property in all locations. See 805 ILCS 5/15.40(e). The same

formula is available to foreign corporations, which also must pay franchise

taxes if they are qualified to do business in Illinois. See 805 ILCS 5/15.55(d).

Some helpful guidance on the definitions of the terms used in the allocation

calculation and the accepted mode of performing the calculation can be found

in the instructions that accompany Form BCA 1.35, Allocation Factor

Interrogatories, which is available on the Secretary of State’s website,

www.cyberdriveillinois.com.

Alternatively, Illinois corporations may elect to pay their franchise taxes

when 100 percent of their business and assets are within Illinois. The

provisions concerning calculations of filing fees, franchise taxes, and the like

are set out in Article 15 of the Business Corporation Act of 1983. See 805

ILCS 5/15.05, et seq. Inclusion of an allocation factor in the articles of

incorporation is optional. Regardless, the corporation will need to decide

whether and, if so, how to allocate its business and property when the first

annual report and calculation of the first franchise tax payment is due. For

Illinois corporations, the first annual report is due within 60 days prior to the

first day of the first anniversary month (i.e., the month in which the

corporation was incorporated). 805 ILCS 5/14.10.

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5. [1.36] Effectiveness of Articles of Incorporation

After the articles of incorporation are filed and accepted by the Secretary

of State, the corporation’s existence begins. 805 ILCS 5/2.15. If filed by

paper, the Secretary of State will return one of the duplicate copies of the

articles, which should be placed in the corporation’s record book.

6. [1.37] Bylaws

The bylaws may contain any provision relating to the regulation and

management of the affairs of the corporation to the extent that they are not

inconsistent with the law or the articles of incorporation. 805 ILCS 5/2.25. An

excellent sample form of bylaws, including cross-references to the Business

Corporation Act, is found in Donna M. Goelz, Ch. 4, Formation of Illinois

Corporations, BUSINESS LAW: CHOICE OF ENTITY §§4.27 – 4.41

(IICLE

, 2022). A simple sample form of bylaws for a corporation is included

in §1.82 below. This sample form assumes that no corporate seal will be

adopted or used since none is required under the BCA. See 805 ILCS

5/3.10(c).

7. [1.38] Meeting of Incorporators

If no directors are named in the articles of incorporation and no pre-

organization subscriptions for shares have been received, then the

incorporators must hold an organizational meeting to name the initial directors

and to call organizational meetings of directors and shareholders. 805 ILCS

5/2.20. Pursuant to 805 ILCS 5/2.05(b), the incorporators may waive notice

and act by unanimous written consent. The forms for such a meeting can

follow the forms used for the initial meeting for directors. See §1.40 below.

8. [1.39] First Meeting of Shareholders

If pre-organization subscriptions have been received, then the filing of the

articles of incorporation with the Secretary of State constitutes acceptance of

the subscriptions by the corporation. 805 ILCS 5/6.20. Whether they became

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shareholders through a pre-organization subscription or a post-incorporation

issuance of shares, the initial meeting of shareholders should be held after the

articles of incorporation have been accepted and filed by the Secretary of

State. At a minimum, the shareholders should take the following actions at the

initial meeting: (a) approve the articles of incorporation and, if shareholders

were not pre-organization subscribers, ratify the filing of the articles of

incorporation; (b) establish the number of initial directors and elect the initial

board if this information is not stated in the articles of incorporation; (c) adopt

bylaws; and (d) approve a buy-sell agreement, if applicable. Other items may

be included as dictated by the circumstances. Unless otherwise restricted in

the articles of incorporation, any action to be taken at a meeting of

shareholders may be taken by written consent, provided it is done in a manner

consistent with the requirements of 805 ILCS 5/7.10. A sample form of

minutes of an initial meeting of shareholders with a waiver of notice is

included in §1.83 below.

9. [1.40] First Meeting of Directors; Corporate Seal

Following incorporation, the initial board of directors, whether specified

in the articles of incorporation or elected at the first meeting of shareholders,

also should meet promptly. The following items should be included on the

agenda for action at that meeting: (a) approve subscription agreements and

call for consideration specified therein; (b) perform valuation of and accept

in-kind consideration for shares; (c) authorize issuance of additional shares to

any persons who were not initial subscribers; (d) adopt bylaws if not

previously adopted by shareholders; (e) elect officers; (f) adopt a form of stock

certificate; (g) adopt banking resolutions; and (h) approve other material

agreements (e.g., buy-sell agreements, profit-sharing plans, and the like).

Shares that are authorized for issuance should be declared to be fully paid and

nonassessable if, in fact, full consideration has been received for them. See

§1.33 above.

If the corporation intends to conduct business under an assumed name

(i.e., a name other than the name indicated on its articles of incorporation), it

should make an assumed name filing with the Secretary of State on Form BCA

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4.15/4.20, Application to Adopt, Change or Cancel an Assumed Corporate

Name, which is available on the Secretary of State’s website,

www.cyberdriveillinois.com.

Unless otherwise restricted in the articles of incorporation or bylaws, any

action to be taken at a meeting of directors may be taken by unanimous written

consent pursuant to the provisions of 805 ILCS 5/8.45. A sample form for a

unanimous written consent of directors is included in §1.84 below. This

sample form, like the sample form of bylaws found in §1.82 below, assumes

that no corporate seal will be adopted or used since none is required. See 805

ILCS 5/3.10(c).

10. [1.41] Form of Stock Certificate

The form of stock certificate must be approved by the directors as noted

in §1.40 above. In addition, 805 ILCS 5/6.35 lists some requirements for stock

certificates. Importantly, the certificate should contain a reference to any

restrictions on transferability, as well as any other restrictions relating to the

class or series of the stock being issued. This reference could be a complete

description of the restriction or simply a reference to its existence that

indicates where additional information about the restriction is available. In

addition, all stock that is issued pursuant to an exemption from registration

under relevant securities laws should bear a legend to that effect. Samples of

these types of legends are as follows:

Securities Law Legend

These securities have not been registered under the Securities Act of

1933. They may not be sold or offered for sale in the absence of an

effective registration statement as to the securities under that Act or an

opinion from counsel satisfactory to the Company that such registration

is not required.

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Legend for Restrictions on Transferability

The shares of stock represented by this certificate are subject to and

transferable only upon compliance with the terms and conditions of the

Agreement among certain shareholders of the Corporation, dated as of

____________, 20__, a copy of which is on file in the office of the

Corporation and available for inspection.

Legend for Restrictions Based on Series or Class of Shares

The shares of stock represented by this certificate are subject to

restrictions contained in the Articles of Incorporation of the Corporation

concerning the series and classes of shares of stock in the Corporation.

D. [1.42] Organizing Other Forms of Corporations

In general, the major concerns and basic steps for the other variants of the

corporate forms (i.e., S corporations, limited liability companies, close

corporations, or professional corporations) are similar to those for a C

corporation. However, each variant requires a few additional (or slightly

different) steps in its incorporation.

1. [1.43] S Corporation

An election to be taxed as an S corporation is made by obtaining the

consent of all shareholders approving the election and filing IRS Form 2553,

Election by a Small Business Corporation. The shareholder consent is

required because the S election will mean that the corporation’s gains will be

taxable to them. Such a resolution may be included in the initial organizational

meeting of shareholders and could be ratified and approved at the

organizational meeting of directors. Such a resolution could read as follows:

RESOLVED, that the Corporation shall elect to be treated as a “small

business corporation” under Subchapter S, Section 1362, of the Internal

Revenue Code of 1986 for income tax purposes, and the President is

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hereby authorized and directed on behalf of the Corporation to execute

and file with the Internal Revenue Service a Form 2553 — Election by a

Small Business Corporation, in the form attached hereto.

A copy of Form 2553 for the election of S status may be found on the IRS’s

website, www.irs.gov.

Practitioners and clients are advised to make this filing by certified mail,

with return receipt requested, so that they have evidence that the S election

has been made in a timely fashion. As noted in §1.8 above, if the election is

not made within two months and 15 days of the start of the entity’s tax year

(or within two months and 15 days of its incorporation), the election will not

be effective until the following tax year. See 26 U.S.C. §1362(b).

If a corporation is going to elect S status, the shareholders should consider

negotiating a buy-sell agreement in which they restrict transferability of their

shares. In this way, they can try to minimize the risk that shares will be

transferred either intentionally or inadvertently to an entity that is not a

permitted shareholder of an S corporation, thus terminating the S election. See

§§1.49 – 1.54 below, regarding buy-sell agreements. See also §§1.16 above

and 1.80 below for a discussion of the need to appoint (and regulate) a

partnership representative to deal with the IRS.

2. [1.44] Close Corporation

Close corporations follow the standard method of incorporation for

business corporations in Illinois with the exception that the articles of

incorporation must contain a heading stating that the entity is being organized

as a close corporation. 805 ILCS 5/2A.05. An existing corporation may elect

to become a close corporation by amending its articles of incorporation to

include such a heading, but this amendment must be approved by all the

shareholders of record. 805 ILCS 5/2A.10.

In addition, in order to qualify as a close corporation, the entity must

impose a restriction on transfer of its shares, either in its articles of

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incorporation or in a separate agreement signed by all shareholders. Id.; 805

ILCS 5/1.80(s), 5/2A.15(2), 5/6.55. The corporation’s stock certificates also

should include a legend describing or referring to the restriction.

If the shareholders of the close corporation are going to elect to conduct

the business themselves and dispense with a board of directors, this provision

must be included in the articles of incorporation. 805 ILCS 5/2A.45(a). This

provision in the articles of incorporation also must be authorized by all

incorporators and subscribers or, in the case of an existing corporation that is

electing close corporation status and amending its articles of incorporation, all

shareholders. 805 ILCS 5/2A.45(b).

Considering the heightened flexibility afforded by the close corporation

statute, shareholders also should consider entering into a more detailed written

agreement concerning how they will manage the affairs of the corporation.

The statute includes a description of possible topics to include in such an

agreement at 805 ILCS 5/2A.40.

3. [1.45] Professional Corporation

Professional corporations also follow closely the standard method of

incorporation for business corporations. As noted in §1.9 above, the articles

of incorporation must state that the corporation is organized solely for the

purpose of rendering one category of professional service. 805 ILCS 10/6.

The name of the corporation must include “Chartered,” “Limited,” “Ltd.,”

“Professional Corporation,” “Prof. Corp.,” or “P.C.” 805 ILCS 10/9.

The Professional Service Corporation Act specifically prohibits issuance

of shares of a professional corporation to anyone who is not duly licensed or

otherwise legally authorized to render the specific professional service for

which the corporation was organized. 805 ILCS 10/11. Thus, it is important

to prepare a form of buy-sell agreement to ensure that when shareholders die

or leave the business their shares do not pass into the hands of individuals who

are not authorized to own them and that a shareholder who loses their license

is required to sell their shares back to the company immediately. See

§§1.49 – 1.54 below. The client should also consider creating a record to

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prove that the shareholders are authorized to own the stock; this might involve

making photocopies of licenses of all shareholders or otherwise obtaining

verification of their qualification to render the professional service in

question.

To the extent that the professional corporation intends to conduct business

under a name that is something other than the name on its articles of

incorporation or continues to use the name of a deceased shareholder or the

name of a member of a predecessor organization, it would need to register its

use of this assumed name with the relevant county recorder’s office. See 805

ILCS 10/9. However, the professional rules applicable to the corporation’s

activities may prohibit certain types of assumed names. Counsel should

consult the relevant professional regulations to verify that all aspects of the

entity, including the statement of corporate purpose, the ownership structure,

the entity’s name, and the makeup of its board of directors, are consistent with

the requirements. See §1.20 above.

E. [1.46] Limited Liability Company and Professional Limited

Liability Company

A limited liability company is created when the Secretary of State accepts

and files its articles of organization. 805 ILCS 180/5-40(a). The articles of

organization contain much of the same information included in the articles of

incorporation used for other corporate forms. The articles of organization

must also include the names and business addresses of the initial managers of

the business; if the corporation is to be managed by its members, then the

names and addresses of the initial members must be included. 805 ILCS

180/5-5(a). The existence of the LLC begins when the articles are filed or on

such later date as is specified in the articles. 805 ILCS 180/5-40(a).

The PLLCA states that the organizers must comply with the

organizational requirements of the LLCA, and it also adds that the articles of

organization must state the specific professional service or related

professional services to be rendered by the PLLC. 805 ILCS 185/11. Further,

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unlike LLCs, PLLCs must also register with the IDFPR and pay a registration

fee to obtain a certificate of registration. 805 ILCS 185/15.

The articles of organization must also include the entity’s name. For an

LLC, this name must include the words “limited liability company” or the

letters “L.L.C.” or “LLC” and may not include “corporation,” “incorporated,”

“limited,” or “limited partnership” or any abbreviation of those terms. 805

ILCS 180/1-10(a). PLLCs must contain the terms “professional limited

liability company,” “P.L.L.C.,” or “PLLC.” 805 ILCS 185/12. In addition, the

articles of organization may include a description of the delegation of

authority by the members to the managers with respect to the operations of

the LLC. See 805 ILCS 180/5-5(a)(8). Alternatively, this delegation may be

made in a separate operating agreement.

If a corporation or LLC is listed as a member or manager of an LLC in

the articles of organization, the Secretary of State’s office usually asks for

evidence of the good standing of this entity, at least if it is not an Illinois

domestic entity. Whether a foreign corporation or LLC will need to qualify in

Illinois to serve as a member or manager of the LLC will depend on the facts

and circumstances of the particular case, and the general descriptions of

“doing business” in the Business Corporation Act of 1983 and the Limited

Liability Company Act do not specifically address the question. See 805 ILCS

5/13.75, 180/45-47.

To the extent that the LLC intends to conduct business under a name that

is something other than the name on its articles of organization, it would need

to apply to the Secretary of State for authority to use this assumed name on

Form LLC-1.20, Application to Adopt, Change, Cancel or Renew an

Assumed Name, which, along with Form LLC-5.5, Articles of Organization,

is found on the Secretary of State’s website, www.cyberdriveillinois.com. See

805 ILCS 180/1-20. However, if the LLC or PLLC is conducting business in

a regulated industry (e.g., law or medicine), the applicable professional rules

may prohibit certain types of assumed names. See §1.10 above.

All members of an LLC may enter into an operating agreement to regulate

the affairs of the LLC and the conduct of its business. 805 ILCS 180/15-5(a).

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Clients should be advised that, in most cases, an LLC should have a written

operating agreement. Such a document is vital to a well-organized LLC and

generally will look like a combination of terms from a partnership agreement,

a set of corporate bylaws, and a buy-sell agreement.

If an LLC does not have an operating agreement, the fallback provisions

of the LLCA will apply, and those are often not what clients intend. For

example, the LLCA states that interim distributions to members must be in

equal shares (805 ILCS 180/25-1) and not in proportion to members’ capital

contributions. Although a written operating agreement can override virtually

any of the fallback provisions of the LLCA, there are 11 specific points on

which the operating agreement cannot override the LLCA. See 805 ILCS

180/15-5(b) (operating agreement cannot (1) unreasonably restrict member’s

right to information; (2) vary right to expel member as specified in §35-45(6);

(3) vary requirement to wind up business as specified in certain parts of §35-

1(a); (4) restrict rights of anyone other than member, manager, and transferee

of member’s distributable interest; (5) restrict member’s power to dissociate

under §35-50 (subject to some permitted restrictions); (6) eliminate or reduce

the obligations or purposes that a low-profit limited liability company

undertakes when organized under §1-26; (7) eliminate or reduce the

obligation of good faith and fair dealing (subject to some permitted

restrictions); (8) eliminate, vary, or restrict the priority of a statement of

authority over provisions in the articles of organization as provided in §13-

15(h); (9) vary the law applicable under §1-65; (10) vary the power of the

court under §5-50; or (11) restrict the right of a member to approve a merger,

conversion, or domestication if the member will have personal liability with

respect to the surviving, converted, or domesticated organization.

In the case of a single-member LLC, some clients are reluctant to spend

the time and money to have counsel prepare an operating agreement for the

logical reason that they can always implement any agreement they want at any

time in the future, and the only signature required to do so is their own.

However, in those cases, counsel should remind the clients that the LLCA

states that for a single-member LLC, an operating agreement can also consist

of any writing (whether or not it would otherwise qualify as an “agreement”)

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that is signed by the sole member and that concerns the LLC’s affairs. See 805

ILCS 180/15-5(c). Similarly, in a single-member LLC with a separate

manager, even an oral agreement concerning the LLC’s affairs can be deemed

to be an operating agreement. See 805 ILCS 180/15-5(c)(3). To avoid the risk

that rogue documents and oral statements might be reconstituted into some

kind of virtual operating agreement (by some third party dealing with the

LLC) with unintended consequences, counsel should ask clients to consider

adopting a written operating agreement for every LLC, even those with just

one member. Perhaps the more likely risk is that a client with a single-member

LLC would fail to inform counsel when additional members were added to

the LLC; in that case, even having a simple operating agreement dating back

to the entity’s single-member days may be preferable to relying on the

statute’s “fallback” provisions.

Prior to January 1, 1997, in order to ensure that the IRS would treat an

LLC like a partnership for income tax purposes and thus assess income taxes

only directly against the members of the LLC and not against the LLC itself,

LLC organizers and their counsel had to structure the LLC so that it included

no more than two of the so-called “Kintner factors” for determining corporate

characteristics. Named for regulations that the IRS issued in response to

United States v. Kintner, 216 F.2d 418 (9th Cir. 1954), these factors meant

that if an entity possessed more than two of four basic characteristics of a

corporation (i.e., centralized management, limited liability for owners,

continuity of life, and free transferability of ownership interests), it would not

be treated as a partnership for tax purposes. Thus, organizers of LLCs had to

draft their operating agreements and related documents carefully to ensure

that these requirements were satisfied.

In 1997 the IRS adopted the Simplification of Entity Classification Rules

(i.e., Treasury Regulations promulgated under 26 U.S.C. §7701; see §1.16

above). These regulations permit an unincorporated organization having at

least two members to elect whether to be classified as a partnership or a

corporation for tax purposes regardless of the number of Kintner factors that

are present in the organization’s structure. Treas.Reg. §301.7701-3(a). These

rules are also called the “check-the-box” rules because the simple form (Form

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8832) by which the election may be made requires only that the filing

organization check a box to indicate its preferred tax treatment. A copy of

Form 8832 is available on the IRS’s website, www.irs.gov.

Of the entities described in this handbook, sole proprietorships,

partnerships, and LLCs are affected by these entity classification rules, under

which an LLC or a partnership with at least two members will be taxed as a

partnership without filing Form 8832. If either of these types of entities wants

to be taxed as a corporation, Form 8832 must be completed and filed. A single-

member LLC will be disregarded as a separate entity without filing Form

8832. These rules do not permit state law corporations, insurance companies,

joint stock companies, certain banks, and certain other types of entities to

make a “check-the-box” election. See Treas.Reg. §301.7701-2(b).

When reviewing operating agreements of existing LLCs, counsel should

keep these rules in mind. Many pre-1997 forms will have restrictions and

limitations that are no longer needed for tax purposes, and these should be

eliminated unless they are relevant to the particular LLC structure at hand. If

a client is drawn to the flexibility of the LLC form but wishes to avoid the tax

issues related to a partnership taxation structure, such as phantom income and

the need for each equity owner to file a return in each state in which the entity

derives income, counsel should advise the client of the option of “checking

the box” and electing corporate tax treatment for the LLC.

Since the allocations of profit and loss in the operating agreement will be

measured by the IRS’s standards for “substantial economic effect” (see §1.24

above), counsel should draft the operating agreement with these standards in

mind. Similarly, if the LLC is to be used to perform a regulated activity,

counsel should consult the relevant professional regulations to verify that all

provisions of the articles of organization and the operating agreement,

including the ownership structure, the entity’s name, and the makeup of its

board of managers, are consistent with the requirements. See §1.20 above.

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F. [1.47] Federal Employer Identification Number

In connection with the creation of any entity, the client should be advised

to complete and file Form SS-4, Application for Employer Identification

Number. This number will be required if the entity plans on filing tax returns,

hiring employees, or opening bank accounts. The instructions which

accompany Form SS-4 indicate that the form must be completed and signed

by a principal officer, general partner, or owner of the entity and this

individual must provide his or her social security number. Thus, it may not be

possible for counsel to complete and sign the form on behalf of a client. Form

SS-4 and its instructions are available on the IRS’s website, www.irs.gov.

G. [1.48] Trademarks, Trade Names, and Service Marks

Each type of entity will operate under a given name, as reflected on its

organizational documents. The Secretary of State will determine the

acceptability of any name of a new entity that is filed with its office. Similarly,

for entities using another name, when the assumed name filings are accepted

for filing (by state or local officials, as the case may be), the client will have

some assurance that no other entity in Illinois is using an identical name.

However, practitioners should also alert clients to the fact that compliance

with these provisions does not eliminate the need to consider other types of

intellectual property registration. See, e.g., 805 ILCS 215/108(g) in the limited

partnership context. First, the state and local filing offices will usually accept

a name for a newly created entity or a newly assumed name as long as it differs

by one or two words from any name presently in use. While this may satisfy

the regulators, businesspeople may be somewhat dismayed to learn that

several other companies have names that seem fairly similar to their new

name. This concern can be partially addressed by searching the database on

the Secretary of State’s website for corporate names containing one or more

of the same words as the client’s proposed name. See §1.28 above.

Further, if a client expects to develop considerable goodwill in its name

(e.g., by using it as a brand name or a product name), the entity should

consider clearing the name for prior trademark filings by others to avoid

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possible infringement suits later. Counsel should also advise the client to

consider state or federal trademark filings on the name as additional protection

against unauthorized use of names or marks by others. A client may resist the

time and expense involved in protective trademark activities at the start of a

new venture, but this expense and time will be worthwhile if the client intends

to spend significant money on development of trademarks and trademarked

materials, such as business cards, brochures, and other printed materials, early

in the life of the entity.

These same considerations will also apply to trade names and service

marks that the new entity will use.

V. [1.49] BUY-SELL AGREEMENTS

A buy-sell agreement is an agreement governing the purchase of stock in

a corporation upon the occurrence of a triggering event, such as retirement,

death, or other termination of a shareholder’s involvement with the

corporation. The purchasers in this situation are the other shareholders, the

corporation itself, or both. In the context of a professional corporation or an S

corporation, the buy-sell agreement can be used to ensure that stock does not

fall into the hands of persons who are not allowed to own it by law; in the case

of a close corporation, the buy-sell agreement is useful to document the

transfer restrictions required by the statute as well as the agreement of the

shareholders concerning the operation of the business.

However, in the case of any type of corporate entity involving a relatively

small number of investors and officers, a buy-sell agreement can help provide

for continuity when facing the departure of a shareholder. In these situations,

even one shareholder may be a significant part of the overall operation in

terms of management as well as ownership. A buy-sell agreement helps ease

the transition involved when one of these shareholders leaves the corporation.

When drafting a buy-sell agreement, counsel could consider including

language specifically describing the benefits that will accrue to all

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shareholders by agreeing to be bound by the terms of the agreement. This

language helps remind the shareholders of the reasons for the restrictions and

helps provide evidence of the beneficial consideration received by each

shareholder in exchange for the restrictions on transfer in case these

restrictions are later challenged by a shareholder or his or her successors.

Counsel should recall that the share repurchases contemplated by a buy-sell

agreement may arise in less-than-ideal circumstances. Thus, in order to

address the possibility that a shareholder may change his or her mind about

the wisdom of the buy-sell agreement’s restrictions once these restrictions are

applied to the shareholder, the buy-sell agreement often includes detailed

provisions concerning the mechanics of share transfer and possession of share

certificates.

For corporations, the agreement should include a provision that the stock

certificates will bear a legend reflecting the limitations of the agreement. This

is required by 805 ILCS 5/6.55, which also contains a list of the types of

restrictions on transferability that are permitted by law. See §1.11 above. If

the entity is a limited liability company or a partnership that will be issuing

some form of certificates as evidence of ownership interests, a similar legend

would be appropriate there as well.

The points discussed in §§1.50 – 1.54 below should be considered when

creating any type of entity with more than one owner; some or all these points

may well be just as appropriate for inclusion in a partnership agreement or in

the operating agreement for an LLC. The five major issues discussed in these

sections should be considered in drafting a buy-sell agreement in addition to

any other issues that may be unique to the situation at hand.

A. [1.50] Scope of Restriction on Transfer

Most buy-sell agreements contain some type of restriction on the ability

of shareholders to transfer their shares. If a client desires a buy-sell agreement,

counsel must assist the client in determining the scope of the restrictions. For

example, a fairly nonrestrictive provision might state only that a departing

shareholder is required to give the corporation and the other shareholders a

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right of first refusal to purchase his or her shares and if they fail to make a

purchase within a specified time, the departing shareholder is free to sell these

shares to a third party.

Alternatively, some shareholder groups are opposed to the notion of being

forced to accept a business partner and fellow shareholder who is not selected

by them but rather is selected and thrust on them by a departing shareholder.

In these cases, the agreement may end up either requiring the corporation or

the other shareholders to purchase the departing shareholder’s shares or else

requiring the departing shareholder to retain an equity interest in the

corporation against his or her will.

In any case, the buy-sell agreement should clearly discuss what will

happen with each party’s rights to dividends, voting rights, and representation

on the board of directors.

B. [1.51] Price

The buy-sell agreement should specify the price at which shares of a

departing shareholder are to be repurchased. The specific dollar price could

be set in the agreement, or the agreement could simply provide a formula

based on one or more factors, including net worth, net earnings, book value,

liquidation value, appraised value, and the like. In addition, if a formula or

other variable price is selected, the agreement should discuss who will be

authorized to apply the formula. Thus, the agreement could specify how an

appraiser or accountant is to be selected and what procedure to follow in the

event of a disagreement about the conclusion reached by the person applying

the formula.

Even if the shareholders are not able to agree on a price or a formula at

the time of preparation of the buy-sell agreement, counsel should advise them

to consider at least specifying which group or entity will have authority to

select or apply the price or formula at the time of sale of shares. The board of

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directors or the corporation’s then-current outside, independent auditors or

accountants may be given this authority.

If the shareholders cannot agree on these terms, counsel should advise

them to consider including some type of dispute resolution mechanism. Thus,

if the shareholders are unable to agree on a price at the time of a future

separation, which is likely if there are any strong emotions or difficult

business circumstances involved at the time, the buy-sell agreement will

provide a mechanism, such as mediation or binding arbitration, by which to

resolve the dispute without forcing a dissolution of the company or distracting

too greatly from the business of the company.

Some buy-sell agreements also provide for several alternative buy-out

prices. If shareholders are worried that a forced buy-out early in the

company’s life will be too great an economic burden to the company and may

unfairly reward a departing shareholder or his or her estate for a minimal

involvement in the growth of the company, they may specify a lower price for

share repurchases in the first few years of the company’s life. Also,

shareholders may wish to use a lower repurchase price as a penalty for

shareholders whose employment is terminated for cause or whose voluntary

resignation comes without sufficient advance notice.

C. [1.52] Triggering Events

The buy-sell agreement should state the event(s) that will give rise to the

repurchase obligation. These events could include death, termination of

employment (with or without cause), or a unilateral decision on the part of

one shareholder to withdraw from the business. In addition, the agreement

should discuss what rights arise when the triggering events occur. Thus, the

agreement might give the departing shareholder the right to require the

corporation or the other shareholders to repurchase the stock. Alternatively,

the agreement might provide that upon occurrence of the triggering event, the

corporation and the other shareholders merely have a right of first refusal to

purchase the departing shareholder’s shares but no obligation to purchase

them.

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In some cases, the parties find it useful to provide for only a single, drastic

remedy if a triggering event occurs or if the directors or shareholders are

deadlocked on a material question. Sometimes the drastic remedy is the right

to demand dissolution of the entity. Some parties find this helpful because it

avoids the need to spend long hours at the outset of the company’s life trying

to decide what future events will carry what types of penalties or buy-out

rights. Rather, the parties simply specify that they will address each future

triggering event or deadlock of the board or shareholders on a case-by-case

basis, and if the parties are not able to resolve any dispute to their mutual

satisfaction within a specified time period, any party can demand liquidation

and dissolution of the entity. If the entity is performing well, the idea of this

provision is that the entity’s success will force the parties to keep negotiating

until they reach an agreement to avoid dissolving.

D. [1.53] Purchaser

The buy-sell agreement should specify who will be the purchaser (e.g.,

the corporation, the other shareholders, or both) in any sale of stock by a

departing shareholder. Further, the agreement should specify whether any

purchaser merely has an option to purchase the departing shareholder’s stock

or whether the purchaser is required to purchase it (i.e., whether the departing

shareholder has the ability to put its shares to the purchaser). Unless the

corporation or the other shareholders are going to be required to purchase the

departing shareholder’s shares, the agreement also should address questions

concerning possible sales of stock to third parties.

E. [1.54] Financing the Purchase

The buy-sell agreement should consider how the purchaser will finance

the purchase. In some instances, the agreement will require the corporation to

maintain a life insurance policy on each shareholder with the proceeds to be

used to repurchase the stock upon the death of the shareholder. The agreement

should also address the case of a purchase that does not involve insurance

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proceeds by specifying whether the selling shareholder or the shareholder’s

estate may be required to accept promissory notes or installment payments

over a period of time.

VI. [1.55] SECURITIES LAW CONCERNS

Sole proprietorships are probably not concerned with securities laws at

all in the context of their creation. However, partnerships and corporations of

all forms must be concerned with these laws. Both federal and state securities

laws give a broad reading to the term “securities” when deciding on the scope

and applicability of these laws. Thus, because it is possible that securities laws

will apply to partnership interests and stock in many cases, counsel must

confirm that exemptions under both federal and state laws will allow the entity

to be formed without it having to comply with the requirements for

registration of securities. In general, the stock of traditional corporate entities

(i.e., C and S corporations) will be deemed to be a security; it is not always

true, however, that partnership interests and limited liability company

interests will be deemed to be securities for purposes of the securities laws.

See, e.g., Great Lakes Chemical Corp. v. Monsanto Co., 96 F.Supp.2d 376

(D.Del. 2000). For example, under federal law and most state securities laws,

LLC interests are evaluated under the category of “investment contracts.” In

this analysis, the LLC interest is deemed to be a security if the purchaser has

contributed capital to the LLC expecting to be essentially a passive investor.

See Daniel S. Kleinberger, Sorting Through the Soup: How Do LLCs, LLPs

and LLLPs Fit Within the Regulations and Legal Doctrines?, 13 Bus.L.

Today, No. 2, 15, 17 (Nov./Dec. 2003).

A. [1.56] Federal Securities Law

The Securities Act of 1933 (1933 Act), ch. 38, Title I, 48 Stat., makes it

unlawful for any person or corporation, directly or indirectly, to sell or offer

for sale by means of any written or oral communication any security that

contains an untrue statement of a material fact or omits a material fact

necessary to make a statement not misleading. 15 U.S.C. §77l(a). These so-

called antifraud rules apply to public companies and to small, closely held

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ones. Thus, whenever an entity is selling securities to investors, counsel

should consider whether complete and accurate information about the entity

and its business and prospects has been disclosed to the investors.

Similarly, the Act makes it unlawful to sell or to offer to sell any security

through the facilities of interstate commerce unless a registration statement

has been filed with the Securities and Exchange Commission (SEC). See 15

U.S.C. §77e(a). The costs associated with registration are substantial; thus, a

small business will need reassurance that its issuance of stock falls within one

of the exemptions from the Act. Sections 1.57 and 1.58 below discuss two

exemptions that are likely to be available to small businesses: the intrastate

exemption and the private offering exemption.

1. [1.57] Intrastate Offering Exemption

Section 3(a)(11) of the Securities Act of 1933 exempts the following from

its registration requirement:

Any security which is a part of an issue offered and sold only to

persons resident within a single State or Territory, where the

issuer of such security is a person resident and doing business

within or, if a corporation, incorporated by and doing business

within, such State or Territory. 15 U.S.C. §77c(a)(11).

This is a somewhat risky exemption on which to rely because a sale to a single

nonresident will destroy the exemption for all sales and the client may be

unwilling or unable to confirm with absolute certainty that it will not seek

additional investors out of state. In order to rely on this exemption, counsel

should obtain from all purchasers written confirmation of their residential

addresses. The buy-sell agreement should also require that no shareholder will

resell shares to persons out of state for at least nine months after the initial

offering of stock. Among other things, this restriction would provide the

corporation with some assurance that the securities would remain with a buyer

within the state for more than the six-month period during which multiple

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transactions are deemed to be part of the same issuance under the

corresponding aggregation rules of the Securities Act of 1933. See 17 C.F.R.

§230.147.

2. [1.58] Private Offering Exemption

The private offering exemption from registration under the Securities Act

of 1933, which is by far the most commonly used exemption, is contained in

§4(a)(2) of the Act (15 U.S.C. §77d(a)(2)); no registration is required for any

transaction by an issuer “not involving any public offering” (Id.). However,

no detailed, authoritative description of the meaning of this phrase has been

provided either in the statute or the corresponding regulations, and no

interpretative advice on this phrase is available from the regulators. As a

result, issuers are often reluctant to rely on this seemingly broad but

disquietingly unspecific exemption.

Happily, for issuers and their counsel, Regulation D, 17 C.F.R. §§230.501

– 230.508, provides two safe-harbor types of private offering transactions that

are deemed not to constitute public offerings. Whenever possible, counsel and

issuers seek to fit their transactions within one of those exemptions, leaving

the exemption under §4(a)(2) as a backup if the Securities and Exchange

Commission ever concludes that the transaction flunks the chosen safe-harbor

test.

Rule 504 of Regulation D states that offers and sales of securities are

exempt from the public offering registration requirements of the Securities

Act of 1933 if certain conditions are met, including (a) the offers and sales

must be made in compliance with or under an exemption from registration

requirements of the securities laws of relevant states and (b) the aggregate

offering price of all securities sold in the current offering and within 12

months prior in other offerings under Rule 504 may not exceed $10 million.

17 C.F.R. §230.504(b). Importantly, Rule 504 does not include any limitation

on the number of offerees or purchasers, and if the offering complies with the

first condition stated above, Rule 504 does not incorporate the specific

provisions from Rule 502(b) of Regulation D concerning information to be

furnished to offerees. See 17 C.F.R. §230.502(b). Thus, although issuers are

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well advised to provide all offerees with detailed, accurate, and complete

information, including financial information, about the issuer and the stock

being offered, the Rule 504 exemption does not dictate the precise contents of

this information.

Rule 506 of Regulation D contains another set of criteria by which an

issuer may qualify for an exemption from the Act’s registration requirements.

To fall within this exemption, the issuer and its agents may not engage in any

general solicitation or advertising relating to the sale of stock, and sales may

be made to no more than 35 purchasers who are not accredited investors. 17

C.F.R. §230.506(b). In addition, Rule 506(b) requires that immediately before

the sale, the issuer, after reasonable inquiry, must believe that each purchaser

who is not an accredited investor has sufficient knowledge and experience to

be capable of evaluating the risks of the investment. Rule 506(b) also

specifically states that issuers must comply with the requirements of Rule 502

concerning financial and other information about the issuer and the offering.

No single fact is a determinative evaluation of whether any Regulation D

exemptions apply, and counsel must examine the totality of the circumstances

surrounding the transactions because that is what the SEC will do if it reviews

the transactions. In addition, to fall within any of these exemptions, each buyer

must purchase with a present intention of holding the securities and not with

a view to resale. Such a representation should be included in any buy-sell or

other shareholders’ agreement, and counsel should place the securities law

legend noted in §1.41 above on all stock certificates to help confirm this

intent.

As noted above, Rule 501(a) of Regulation D provides the qualifications

for an accredited investor. Rule 501(a) basically provides that wealth or

sophistication are sufficient to qualify one for this status. Because accredited

investors are excluded from the 35-person limits in Rules 506(b) (17 C.F.R.

§230.501(e)(1)(iv)), issuers are often interested in knowing which investors

will meet these criteria. Thus, counsel may wish to include some

representations regarding wealth or familiarity with the business in any form

of subscription agreement or buy-sell agreement to memorialize those

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investors who were considered accredited. At a minimum, this information

should be included in a memo to the file that analyzes the stock issuance in

light of securities laws.

In addition, to help the client avoid any claims that it violated the antifraud

rules that apply to all securities sales (even those not involving a public

offering), counsel should document the information about the entity that was

circulated to investors. Although assembling a private offering memorandum

can be costly and time consuming, it is often the best way to confirm that all

investors are given full and accurate information about the investment and its

attendant risk.

Finally, if the corporation will rely on the offering exemptions in Rules

504 or 506, the corporation must file a notice of sales on SEC Form D, Notice

of Exempt Offering of Securities, within 15 days of the date of the first sale.

This form is available at the SEC’s website, www.sec.gov. All Form D filings

must be made online, and the website explains how to complete those online

filings.

Rule 508 of Regulation D states that failure to comply with a term,

condition, or requirement of Regulation D will not result in the loss of the

exemption for a particular offer or sale if the issuer meets the criteria specified

in the rule. 17 C.F.R. §230.508(a). This does not necessarily mean that counsel

and issuers can ignore the Form D filing requirements, but it does provide

some comfort that another exemption is arguably available if a Form D filing

is found to be deficient. Further, issuers can attempt to conduct their offerings

of securities under the broad provisions of §4(a)(2) of the Act. However, this

is somewhat risky because there are no clear rules about what kinds of

offerings qualify under §4(a)(2). Thus, there is some risk that the SEC might

disagree with an issuer’s characterization of its offering. Because Regulation

D contains a more predictable set of rules about what offerings will qualify as

“private,” it provides more comfort to small issuers and their counsel.

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3. [1.59] Violations of Federal Securities Law

If securities are sold in violation of federal securities law, the purchaser

has a right to rescind the contract of sale, and criminal and civil sanctions may

also be imposed. 15 U.S.C. §§77l(a), 77x. Importantly, liability for this

repurchase obligation is not limited to the issuer; underwriters, dealers, and

officers and directors of the issuer also may be jointly and severally liable if

they participated in or aided the sale. See 15 U.S.C. §77l(a).

B. [1.60] Illinois Securities Law

The Illinois Securities Law of 1953, 815 ILCS 5/1, et seq., contains

provisions much like the Securities Act of 1933 requiring that securities must

be registered before being offered for sale. However, as discussed in §§1.61

– 1.64 below, the Illinois Securities Law of 1953 also provides several

exemptions from registration with direct applicability in the small business

context.

1. [1.61] Preincorporation Subscriptions

Section 4 of the Illinois Securities Law of 1953 exempts from registration

offers and sales of pre-organization subscriptions and the issuance of shares

pursuant to these subscriptions. 815 ILCS 5/4M. The exemption is available

only if the number of subscribers does not exceed 25 and either (a) no

commission or other payment is made on account of such sales or (b) if a

commission or payment is made, the securities are not sold by means of

general advertisement or general solicitation in Illinois. Id. No filing is

required to obtain the benefit of this exemption.

2. [1.62] Sales to Fewer than 35 Persons or Offerings Less than

$1 Million

The Illinois Securities Law of 1953 exempts from registration offers and

sales to residents and nonresidents of Illinois in which (a) all sales to Illinois

residents within the preceding 12-month period have been made to not more

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than 35 persons or have involved an aggregate sales price of less than $1

million, (b) the offering did not involve any general advertising or solicitation

in Illinois, and (c) any commissions paid did not exceed 20 percent of the sale

price if sold to an Illinois resident. 815 ILCS 5/4G(1). To qualify for the

exemption, the issuer must file Form 4G, Report of Sale Pursuant to Section

4.G of The Illinois Securities Law of 1953, with the Secretary of State no later

than 12 months after the date of the first sale to an Illinois resident. See 815

ILCS 5/4G(4); 14 Ill.Admin. Code §130.440(a). Form 4G is available at the

Secretary of State’s website, www.cyberdriveillinois.com.

3. [1.63] Sales to Existing Security Holders

An offer and sale of an issuer’s stock to existing shareholders of the issuer

is exempt from registration under §4B of the Illinois Securities Law of 1953

if no commission is paid. 815 ILCS 5/4B. No filing is required to qualify for

this exemption.

4. [1.64] Miscellaneous

Additional exemptions from registration for specific types of securities

and transactions other than those discussed in §§1.61 – 1.63 above are

available in §§3 and 4 of the Illinois Securities Law of 1953. These include

exemptions for issuance of stock of banks, savings and loan associations,

credit unions, railroads, and public utility holding companies and issuance of

stock in connection with statutory mergers and consolidations. See, e.g., 815

ILCS 5/3C, 5/3D, 5/3E, 5/4J.

5. [1.65] Violations of Illinois Securities Law of 1953

If securities are sold in violation of the Illinois Securities Law of 1953,

the purchaser has a right to rescind the contract of sale, and criminal and civil

sanctions may also be imposed. 815 ILCS 5/13A, 5/14. In Illinois, every sale

of a security made in violation of the Illinois Securities Law of 1953 is

voidable at the election of the purchaser, provided the purchaser exercises the

right within six months of learning that the sale is voidable. 815 ILCS 5/13B.

The issuer may cut off these rights if it offers to repurchase the securities for

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the full amount of the purchase price, plus interest and minus income received

on account of the securities, and the offer is not accepted within 15 days. 815

ILCS 5/13C. The Securities Act of 1933 does not contain a similar cure

provision. Liability for this repurchase obligation is not limited to the issuer;

underwriters, dealers, officers, and directors of the issuer may also be jointly

and severally liable if they participated in or aided the sale. 815 ILCS 5/13A.

VII. CAPITALIZATION AND FINANCING OF

CORPORATIONS

A. [1.66] Equity and Debt

Equity and debt represent the two basic vehicles for getting money into

an operating entity. Because of their “pass-through” tax effect, sole

proprietorships and partnerships are not as concerned with some of the

distinctions between debt and equity as are corporations. However, even in

the partnership situation, some of the differences bear noting. In all cases, the

client’s tax preparer or accountant should be consulted before making any

decisions about allocations of equity and debt.

It may be advantageous to some clients to consider using promissory

notes or other debt instruments as a means of putting funds into a corporation.

Interest payments on debt are deductible by the corporation, thus providing an

advantageous way to pay money to the investors. By contrast, dividend

payments are not deductible. Further, repayment of principal on a debt does

not incur any dividend taxation, whereas redemption of stock, which would

arguably be the equity counterpart to the debt concept of repaying the

principal amount of the debt, is limited by statute. See 805 ILCS 5/9.05,

5/9.10. If the corporation files for bankruptcy and if part of a shareholder’s

investment is in the form of debt, the shareholder may be able to obtain at

least a partial repayment of this debt, along with other creditors in the

bankruptcy proceedings.

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In order to qualify for the beneficial debt treatment discussed above, the

corporation should issue debt securities very carefully. While the corporation

and its investors are free to label instruments as debt (e.g., “promissory note”)

or equity (e.g., “common stock certificate”), the IRS has taken the position

that these designations made by the parties at the time of issuance, while

binding on the issuer and the holders of the interest, are not binding on the

Secretary of the Treasury or the IRS. 26 U.S.C. §385(c)(1). If the debt

securities do not pass inspection by the IRS, the IRS may deem them to be

equity securities regardless of what the corporation calls them.

Code §385(b) suggests five guidelines that might be useful in evaluating

whether a security can qualify as a debt security even if issued to a shareholder

of the issuer. No single factor will be sufficient to ensure a determination of

equity or debt status, and in the absence of clear statutory or regulatory

guidance, decisional law is dispositive. Unfortunately, the decisional law on

this point is varied and expands the list of relevant factors significantly. See,

e.g., John Kelley Co. v. Commissioner, 326 U.S. 521, 90 L.Ed. 278, 66 S.Ct.

299 (1946); Fin Hay Realty Co. v. United States, 398 F.2d 694 (3d Cir. 1968);

Boris I. Bittker and James S. Eustice, FEDERAL INCOME TAXATION OF

CORPORATIONS AND SHAREHOLDERS, pp. 4-25 through 4-31 (7th ed.

2000). It is difficult to say with certainty how these factors are going to be

enforced in any particular case. The five guidelines described in Code §385(b)

are discussed in §§1.67 – 1.71 below.

1. [1.67] Unconditional Promise To Pay

The debt instrument should contain a written, unconditional promise to

pay on demand or on a specified date a sum certain in money in return for an

adequate consideration in money or money’s worth and to pay a fixed rate of

interest. 26 U.S.C. §385(b)(1).

2. [1.68] Subordination or Preference

In determining whether an instrument is debt or equity, the IRS will

examine whether there is subordination to or preference over any other

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indebtedness of the corporation. 26 U.S.C. §385(b)(2). In principle, a general

subordination to all creditors would be more suggestive of an equity interest

than an absence of subordination or a subordination only to a specific existing

creditor.

3. [1.69] Ratio of Debt to Equity

If the corporation has debt outstanding with an aggregate principal

amount many times greater than the aggregate equity investment of its

shareholders, the IRS may deem some of the debt to be equity. 26 U.S.C.

§385(b)(3).

4. [1.70] Conversion of Debt into Stock

If debt instruments include a right to be converted into stock, the IRS may

use this factor as a basis for treating the debt as equity. 26 U.S.C. §385(b)(4).

5. [1.71] Ownership of Debt and Equity

If the debt is owned by the same persons who own stock and in the same

proportions, the IRS may consider treating the debt as equity. 26 U.S.C.

§385(b)(5).

B. [1.72] 26 U.S.C. §1244

Counsel should also review with the client and the client’s tax planner the

possibility of having a C corporation’s stock treated as Code §1244 stock for

federal tax purposes. Although the S corporation and the limited liability

company forms allow for losses to be available to shareholders immediately,

the C corporation form is not as streamlined. This means that losses of the

corporation will not be useful unless the corporation has subsequent gains

against which to offset them. The tax advantage of these losses is substantially

(if not entirely) lost if, for example, the corporation generates losses and then

is abandoned or liquidated.

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Code §1244 states that if certain conditions are met, shareholders can take

advantage of any losses generated by the corporation, although these losses

are generally deductible only when the §1244 stock is sold, or the corporation

is liquidated. To qualify as §1244 stock, the stock must be original-issue stock

issued to an individual or a partnership for cash or other property, other than

stock or securities. 26 U.S.C. §1244(c)(1). In addition, the corporation must

meet the size requirements of Code §1244(c)(3), and during the five years

preceding the date the loss was sustained, the corporation must have derived

more than 50 percent of its aggregate gross receipts from royalties, rents,

dividends, interests, annuities, or sales or exchanges of stock. Id. Clients and

their tax planners should consult §1244 and related regulations for a more

detailed discussion of these and other limitations and conditions on these

deductions. Whether §1244 will be available in a particular situation may have

an impact on whether the C corporation form will be workable.

For stock issued on or before November 6, 1978, the effective date of the

amendments made by the Revenue Act of 1978, Pub.L. No. 95-600, 92 Stat.

2763, the requirements for qualification as §1244 stock were slightly more

onerous and required, among other things, adoption of a written plan by the

board of directors. See Anthony Polito, 760-4

T.M., Small Business

Corporation Stock: Special Tax Incentives.

C. Outside Sources of Financing

1. [1.73] Banks

Banks are the primary source of outside financing for small and medium

size businesses. Bank loans are almost always short term, but they usually can

be renewed if the corporation’s operations and growth prospects are

promising. Bank financing can be either secured or unsecured. However, in

the case of a small corporation, banks are likely to require guarantees from

the principal shareholders. Unlike commercial finance companies, however,

banks are generally not interested in financing a customer on a secured basis

unless they believe it is likely that eventually the customer will qualify for

unsecured financing. A bank is probably the best place to start looking for

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outside capital; even if the customer does not qualify under the bank’s lending

requirements, the banker may be able to recommend other sources, such as

finance companies or venture capital groups.

2. [1.74] Finance Companies

Finance companies usually are willing to take greater risks than

commercial banks, and accordingly, they charge higher rates of interest.

Finance companies generally make secured loans, taking liens on receivables,

inventory, and equipment as collateral. These loans are generally short term.

Lockbox and revolving loan arrangements are sometimes economical ways to

ensure that interest is charged only on the money borrowed from day to day,

especially if cash needs vary greatly in the short term.

3. [1.75] Venture Capital Groups

Venture capital groups are sometimes more willing than banks to make

riskier investments in relatively unproven corporations. Instead of the higher

interest rates that finance companies would charge for taking this risk, venture

capital groups often seek equity in the corporation as a way to offset their risk.

Thus, in exchange for providing capital to a new corporation, a venture capital

group usually will demand either stock or warrants to acquire stock. Because

venture capital groups are typically interested in corporations that have at least

some operating history, however brief or unprofitable, they may not be the

most likely prospects for start-up financing. Clients should be advised to

consider them, especially when starting corporations in industries that are

particularly “hot” at the moment in the venture capital area.

4. [1.76] Leasing

Real estate and certain major equipment can be financed indirectly by

leasing, rather than purchasing it. This reduces the immediate cash flow needs

of the corporation and, in some cases, provides some useful tax deductions for

the rental paid. Again, tax advisors should be consulted when structuring any

such arrangement.

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5. [1.77] Governmental Agencies

Several state and federal governmental agencies have loan programs

available to small businesses, especially (in the case of state programs) those

that can promise the creation of some number of jobs over time. Clients should

be encouraged to contact the United States Small Business Administration,

the Illinois Department of Commerce and Economic Opportunity, and other

agencies with these types of loan programs.

VIII. [1.78] OPERATING THE BUSINESS ENTITY

As part of the process of organizing a new business entity, counsel should

question the client on the nature of the entity’s business activities. Often, the

city or county in which the entity is located will require it to obtain a business

license to engage in certain types of activities. For example, the City of

Chicago Department of Business Affairs and Consumer Protection issues over

70 different types of business licenses, regulating diverse entities providing

services ranging from adult family care to body piercing to guard dog services

to pawnbrokers. Importantly, the Chicago Municipal Code not only outlines

licensure requirements for those types of entities but also includes a

requirement that any entity conducting general sales, services, and operations

in Chicago that does not fall under another license category must obtain a

limited business license to conduct business in Chicago unless it is exempt

under some other law. See generally Chicago Municipal Code §§4-4-010

through 4-4-390. County-level licenses are sometimes required as well. See,

e.g., Cook County General Business License Ordinance, Cook County Code

of Ordinances §§54-380 through 54-395.

All too often, the client and the attorney complete the process of creating

the business entity, then stop communicating with one another until a problem

or a new opportunity arises. For sole proprietorships and many partnerships,

this is probably a satisfactory arrangement, although clients should always be

encouraged to bring material contracts to counsel for review. If a limited

partnership or limited liability limited partnership has elected to use an

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assumed name, both counsel and the client should note when this election will

expire and plan to file a renewal form at the appropriate time. See 805 ILCS

215/108.5(d).

However, in the case of any of the variations of the corporate form,

counsel should alert the client to the need for regular documentation of the

corporate form. Meetings of shareholders and directors (or consents in lieu

thereof) should be documented at least once per year. Counsel must alert the

client to the fact that the corporate veil that insulates shareholders, officers,

and directors from liability for the obligations of the corporation can be lost if

the corporation fails to attend to these formalities. See, e.g., People v. V & M

Industries, Inc., 298 Ill.App.3d 733, 700 N.E.2d 746, 233 Ill.Dec. 218 (5th

Dist. 1998). In some cases, Illinois courts have held parent companies,

shareholders, and even officers and directors liable for obligations of a

corporation in situations in which the two-part, veil-piercing test was met. The

lack of corporate formalities is often an important factor in a court’s

determination that the corporation is merely the alter ego of the parent,

shareholder, officer, or director. See, e.g., Fontana v. TLD Builders, Inc., 362

Ill.App.3d 491, 840 N.E.2d 767, 775 – 776, 298 Ill.Dec. 654 (2d Dist. 2005).

See §1.7 above.

In all types of entities with any liability protection for owners and

managers, the durability of this protection is at risk if the owners comingle the

entity’s funds with their personal funds or otherwise stop treating the entity as

separate and distinct. Clients using any of these entities (i.e., corporations,

limited partnerships, limited liability companies, limited liability partnerships,

and LLLPs) should be warned that corporate bank accounts and finances

should be maintained separate and distinct from the accounts and finances of

the equity owners. Again, a failure to observe this corporate formality could

result in a loss of the limited liability offered by the corporate form. Personal

mortgage payments should not be made on company checks, company credit

cards should not be used for personal expenses (unless promptly reimbursed

to the company), and contracts signed on behalf of the company should have

a signature line that includes the full name of the company and the name and

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title of the individual signing on behalf of the company. See, e.g., Hystro

Products, Inc. v. MNP Corp., 18 F.3d 1384 (7th Cir. 1994).

Importantly, some courts have held that in a property veil-piercing

situation, liabilities of the corporation may be imposed not just on officers,

directors, and shareholders but also on other individuals involved in the

corporation’s activities. See Buckley v. Abuzir, 2014 IL App (1st) 130469, 8

N.E.3d 1166, 1177, 380 Ill.Dec. 624.

Corporations must file annual reports with the Secretary of State and must

pay an annual franchise tax at this time. A failure to make this filing will result

in a loss of good standing in the state and, eventually, in administrative

dissolution of the corporation. 805 ILCS 5/12.35. Similarly, LLCs must file

annual reports with the Secretary of State and pay an annual fee. 805 ILCS

180/50-1(a). A failure to make this filing will result in a loss of good standing

in the state and, eventually, in administrative dissolution of the LLC. See 805

ILCS 180/35-25. Limited partnerships and LLLPs must also make regular

renewal filings with the Secretary of State. Under the Uniform Limited

Partnership Act (2001), these filings must be made annually. See 805 ILCS

215/210.

Counsel should remind partnerships of their ability to file a statement of

dissociation when a partner dissociates from the partnership, but the

partnership continues. See, e.g., Form UPA-704, Illinois Uniform Partnership

Act Statement of Dissociation, which is available at the Secretary of State’s

website, www.cyberdriveillinois.com. This filing permits the partnership to

limit the authority of departed partners, and absent such a filing, the

partnership remains bound by acts of dissociated partners for two years after

dissociation. 805 ILCS 206/704(b), 206/702(a). ULPA (2001) suggests a

similar notice of dissociation might be applicable to limited partnerships and

LLLPs organized under that Act. See 805 ILCS 215/606.

For a more complete discussion of the operating aspects of Illinois

corporations, see Todd M. Young and Constance M. Mayer, Ch. 6, Corporate

Operating and Maintenance Issues, BUSINESS LAW: CHOICE OF

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ENTITY (IICLE

, 2023). See also Committee on Corporate Laws, ABA

Section of Business Law, MANAGING CLOSELY HELD

CORPORATIONS: A LEGAL GUIDEBOOK (2003), reprinted at 58

Bus.Law. 1073 (2003).

IX. [1.79] APPENDIX — SAMPLE FORMS

Virtually all the governmental forms that are discussed in this handbook

are available online and as noted in §1.1 above, the online sources are more

reliably current than any paper copies maintained in counsel’s offices. For this

reason, no copies of those forms have been included with this handbook.

A. [1.80] Partnership Agreement

NOTE: The following form of partnership agreement does not attempt to

anticipate detailed provisions about allocation of voting rights, rights to

partnership distributions, or other arrangements between partners concerning

control and allocation of gain and loss from the partnership to the partners.

Tax counsel or the tax accountant for the entity should be consulted in

connection with drafting these provisions since, among other things, the IRS

may disregard these allocations if it finds that they do not have “substantial

economic effect,” a standard imposed and defined by the IRS. See §1.24

above.

PARTNERSHIP AGREEMENT

THIS AGREEMENT is made on ____________, 20__, by and among

_______________, _______________, _______________, and

_______________, all of _______________, Illinois. The parties to this

agreement hereby organize a partnership (the Partnership) and agree as

follows:

1. The name of the Partnership shall be _______________, and the

Partnership is being formed to carry on the business of _______________.

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The Partnership is formed under and shall be governed by the terms of

the Uniform Partnership Act (1997), 805 ILCS 206/100, et seq. The rights

and liabilities of the partners in the Partnership shall be as set forth in

the Uniform Partnership Act (1997), except to the extent otherwise

specified in this Agreement. The office of the Partnership shall be in

_______________, Illinois, or such other place or places as the partners

may select.

2. The initial capital contributions of the partners, all of which shall

be in cash, shall be as follows:

NAME AMOUNT

______________ $______________

Additional capital contributions shall be made in accordance with

Paragraph 3.

3. The net profits and losses of the Partnership shall be computed

on a semiannual basis and shall be credited or charged to the capital

accounts of the partners as of the end of each June and December,

beginning in ____________, 20__, in proportion to the respective

percentage interests of the partners, which are hereby agreed to be on the

following basis:

______________ ______________%

Net losses, if any, shall be charged against the capital accounts of the

partners. Each partner may withdraw [his] [her] [their] own share of

profits except that (a) the partner will contribute to the capital of the

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Partnership 25 percent of [his] [her] [their] own share of the net profits of

the Partnership earned prior to ____________, 20__, and (b) after

____________, 20__, the partner will from time to time contribute to the

capital of the Partnership such portion of [his] [her] [their] own share of

the net profits as may be necessary to maintain [his] [her] [their] own

capital account at an amount equal to the figure set forth opposite [his]

[her] [their] own name in Paragraph 2 plus 25 percent of [his] [her] [their]

own share of the net profits of the Partnership earned prior to

____________, 20__. All such contributions shall be credited to the

respective capital accounts of the partners. Except upon unanimous

agreement of the partners, the capital contributions of the partners shall

not be subject to withdrawal. In any event, no part of the capital

contribution of any partner shall be withdrawn unless all liabilities of the

Partnership, except liabilities to partners on account of [his] [her] [their]

capital contributions, have been paid or unless the Partnership has assets

sufficient to pay them. No partner shall have the right to demand or

receive property other than cash in return for [his] [her] [their] own

capital contribution although such capital contribution may be returned

in Partnership property other than cash. No partner shall have priority

over any other partners as to return of capital contributions. No interest

shall be paid with respect to any capital contributions of the partners.

4. Advances made by any partner to the Partnership in excess of

their own capital contribution shall be deemed a debt of the Partnership

to such partner and shall bear interest at five percent per annum, payable

semiannually. Unless otherwise agreed, the Partnership shall repay any

such advance within 60 days after demand.

5. The fiscal year of the Partnership shall be the calendar year, and

its accounts shall be computed on the accrual basis. Full and accurate

accounts of all transactions of the Partnership shall be kept in proper

books of account. All Partnership business shall be transacted, all

accounts shall be carried, and all property shall be held in the name of

the Partnership.

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6. In general conduct of the business, all the partners shall be

consulted as far as practicable. Any disagreement as to the management

and conduct of the Partnership business shall be settled by the vote of

partners entitled to more than 50 percent of the net profits.

7. No partner shall, without the written consent of the other

partners (a) assign, transfer, loan, pledge, or use the money or other

property or credit of the Partnership for any purpose except for the

business of the Partnership; (b) do or willingly suffer to be done anything

whereby any Partnership property may be subject to attachment or to

being taken on execution, compromise, or release any of the

Partnership’s claims or debts, except upon payment in full; (c) assign,

mortgage, or sell [his] [her] [their] share in the Partnership or any part

thereof, except to another partner, or enter into any agreement as the

result of which any person shall become interested with the partner in the

Partnership; (d) individually endorse any note or otherwise become

guarantor or surety for any person; (e) lend or borrow money or execute

any promissory note on behalf of the Partnership; (f) confess a judgment

on behalf of the Partnership; (g) submit a Partnership claim or liability

to arbitration or mediation; or (h) use the name, credit, or property of

the Partnership for any purpose other than a proper Partnership

purpose.

8. The Partnership shall commence on and as of the date of this

Agreement and shall continue from year to year until it is terminated as

provided in this Agreement.

9. Any partner may retire from the Partnership as of the end of any

month upon at least 60 days’ prior written notice to the other partners.

10. In the event of the retirement or death of a partner, the

remaining partners shall have the right to continue the business of the

Partnership under its present name, either by themselves or with any

other person or persons they may select, but they shall pay to the retiring

partner or the partner’s legal representative the value of the partner’s

interest in the Partnership, as provided in Paragraph 11.

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11. The value of the interest of a retiring or deceased partner shall

be equal to such partner’s capital account plus any unpaid loans or

advances due the partner, plus or minus such partner’s share of the

profits or losses of the Partnership that have not previously been

withdrawn or charged against or credited to such partner’s capital

account. The foregoing computations shall be made as of the date of

retirement or as of the last day of the month of the deceased partner’s

death. The value so determined shall be paid within 90 days after

retirement or death. No allowance shall be made for the goodwill of the

Partnership in any accounting among the partners.

12. The Partnership shall be dissolved if (a) any partner dies or

wishes to retire or withdraw from the Partnership and the remaining

partners do not elect to purchase the interest of the retiring or deceased

partner or (b) the partners mutually agree to dissolve the Partnership. In

either case, the Partnership shall terminate and the partners (or

remaining partners, as the case may be) shall proceed with reasonable

promptness to liquidate the business of the Partnership. The assets of the

Partnership shall first be used to pay or provide for all debts of the

Partnership. The remaining assets shall be divided according to the

proportionate interests of the partners on the basis of their respective

capital accounts on the date of termination after crediting or charging

thereto the net profit or loss, as the case may be, from the date of the last

accounting to the date of the termination.

13. The Partnership shall obtain any licenses necessary respecting its

business before commencing business.

14. The partners acknowledge that §1101 of the Bipartisan Budget

Act of 2015 (Bipartisan 2015 Act), Pub.L. No. 114-74, 129 Stat. 584,

applies to the Partnership’s tax returns.

(a) All Code Section references in this Section 14 are to the

partnership audit provisions of Subchapter C of Chapter 63 of the Code

as amended by the Bipartisan 2015 Act and in effect for any relevant

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Partnership taxable year (such provisions, together with applicable

Treasury Regulations and other IRS guidance, are referred to herein as

the “New Audit Rules”). As used below, the term “reviewed year” means

the Partnership’s taxable year to which the item being adjusted relates,

and the term “adjustment year” means the Partnership’s taxable year (i)

in which a decision of a court becomes final in a petition for readjustment

proceeding brought under Section 6234 of the Code, (ii) in which a

request for administrative adjustment is made by the Partnership under

Section 6227 of the Code, or (iii) in any other case, in which a notice of

final partnership adjustment is mailed under Section 6231 of the Code.

(b) Unless directed to do otherwise by a Partners Decision, the

Partnership shall if eligible, elect to have the New Audit Rules not apply

to the Partnership.

partnership representative (the “Partnership Representative”) under

Section 6223 of the Code so long as it qualifies as a partnership

representative thereunder or until removal of such person as the

Partnership Representative by a “Partners Decision.” As used herein, a

“Partners Decision” shall mean a vote by [approval requirement]. If there

is no Partnership Representative, then the new Partnership

Representative shall be designated by Partners Decision. Subject to the

provisions of this Section 14, the Partnership Representative shall have

all the powers and authority of a partnership representative under the

New Audit Rules and shall represent the Partnership. The Partnership

Representative shall provide to the partners prompt notice of any

communication to or from, or agreements with, any federal, state, or local

tax authority regarding any Partnership tax return or other Partnership

tax matter, including a summary of the provisions thereof. As used herein

the term “Code” shall mean the Internal Revenue Code of Internal

Revenue Code of 1986, as amended from time to time.

(d) Notwithstanding anything contained herein to the contrary, the

Partnership Representative is hereby authorized, only by a prior

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Partners Decision, and required if so instructed by a Partners Decision,

to take the following actions or inactions at the Partnership’s cost:

(i) make any elections or decisions under the New Audit Rules,

including with respect to any IRS examination of the Partnership

commenced under Section 6231(a) of the Code,

(ii) conduct or make any decision to initiate any administrative or

judicial proceedings involving the Partnership under the New Audit

Rules,

(iii) make a request for administrative adjustment with respect to the

Partnership under Section 6227 of the Code,

(iv) file a petition for readjustment under Section 6234 of the Code

(including choice of judicial forum) with respect to an FPAA (as

defined below),

(v) appeal an adverse judicial decision, and

(vi) make any decision regarding the compromise, settlement or

dismissal of any such proceedings.

(e) With respect to any audit of the Partnership, the Partnership

Representative shall cause the Partnership to make a timely election

under Section 6226(a)(1) of the Code (a “Push-Out Election”) with

respect to any imputed underpayment for the reviewed year or years.

After such Push-Out Election is made, the Partnership shall timely

furnish to the Internal Revenue Service (IRS) and each person that was

a partner of the Partnership during the reviewed year to which such

underpayment relates a statement (the “Section 6226 Statement”) of such

partner’s share of any adjustment to income, gain, loss, deduction, or

credit for the reviewed year, as determined in the final partnership

administrative adjustment (FPAA). To the extent the partners’ respective

shares of such adjustments are not determined in the FPAA, such shares

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shall be determined by Partners Decision based on the allocations

described in Section 3 of this Agreement for the reviewed year, which

determination shall be made in the reasonable discretion of the partners

by Partners Decision. Each partner receiving a Section 6226 Statement

with respect to a reviewed year shall timely report and pay such partner’s

tax liability imposed by the Code for the partner’s taxable year that

includes the date on which the Section 6226 Statement was furnished to

the partner, which tax liability shall include the “adjustment amounts”

described in Section 6226(b)(2) of the Code, including interest

determined in the manner and at the underpayment rate specified in

Section 6226(c)(2) of the Code and any applicable penalties and additions

to tax (which are determined at the Partnership level under Sections

6221(a) and 6226(c)(1) of the Code but imposed on the partners). Each

such Partnership shall timely provide to the Partnership such evidence

as the Partnership Representative shall reasonably require to establish

that partner’s compliance with the requirements of Section 6226 of the

Code.

(f) If for any reason the Partnership is liable for any tax, imputed

underpayment, interest, or penalty as a result of any audit under the New

Audit Rules (collectively, “Partnership Audit Payments”), then:

(i) Each person who was a partner during any portion of the

reviewed year (including, without limitation, former partners) shall

indemnify and pay the Partnership an amount equal to such person’s

proportionate share of such liability, based on the amount each such

person should have borne (computed at the tax rate used to compute

Partnership’s liability) had the Partnership’s tax return for such

taxable year reflected the audit adjustment, and the expense for the

Partnership’s payment of such Partnership Audit Payments shall be

specially allocated to such persons (or their successors) in such

proportions. Notwithstanding the foregoing, such apportionment of

liability shall also take into account the extent to which the

Partnership’s imputed underpayment was modified by adjustments

under Section 6225(c) of the Code (to the extent approved by the IRS)

and attributable to (A) a particular partner’s tax classification, tax

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rates, tax attributes, the character of tax items to which the

adjustment relates, and similar factors, or (B) the partner’s filing of

an amended return for the partner’s taxable year that includes the

end of the Partnership’s reviewed year and payment of required tax

liability in a manner that complies with Section 6225(c)(2) of the

Code. To the extent an imputed underpayment results from the

reallocation of the distributive share of any Partnership tax item

from one partner to another, the partner(s) whose shares of any item

of income or gain are increased, or whose shares of any item of loss,

deduction, or credit are decreased, shall be treated as bearing the

economic burden of such imputed underpayment.

(ii) The Partnership Representative shall, in consultation with

the Partnership’s accounting firm, determine a tentative

apportionment of the Partnership Audit Payments among the

partners and former partners and shall notify such persons as soon

as reasonably practicable of its determination and the facts and

analysis supporting such determination. Each such partner or former

partner shall have 30 days to object to such apportionment and

propose an alternative basis of apportionment or adjustment thereto

and the basis therefor. A final apportionment shall then be

determined by Partners Decision in their reasonable discretion and

shall, as soon as reasonably practicable thereafter, deliver a notice to

all applicable persons of such determination after which each such

person shall remit any amounts due to the Partnership within 15 days

thereafter.

(iii) The Partnership, as directed by Partners Decision, shall

apply any distributions, fees, or other amounts payable under this

Agreement to any partner or any affiliate of such partner to offset

any payments due to the Partnership from such partner pursuant to

this Section 14(f).

(iv) The provisions of this Section 14 shall survive the

termination or dissolution of the Partnership or the termination of

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any partner’s interest in the Partnership and shall remain binding on

the partners for as long of a period of time as is necessary to resolve

with any taxing authorities any and all matters regarding the United

States federal income tax matters of the Partnership, its partners or

former partners.

(v) The Partners hereby consent to any amendments to this

Section 14 that are determined by Partners Decision to be reasonably

necessary and appropriate to address additional guidance provided

in Treasury Regulations or other IRS guidance relating to the New

Audit Rules, or to take into account subsequently enacted

amendments to the New Audit Rules.

15. This Agreement may be amended in whole or in part by any

agreement of all the partners at any time during the term of the

Partnership. Any such amendment shall be in writing, dated, and signed

by all the partners. If any conflict arises between the provisions of

amendments and the terms of this Agreement, the most recent provision

shall govern and control. This Agreement constitutes the entire

understanding among the partners and supersedes all prior negotiations,

commitments, representations, and writings concerning the Partnership.

16. All notices given by any partner to any other partner under this

Agreement shall be in writing and sent by registered or certified mail,

postage prepaid, addressed to the respective addresses indicated next to

their signatures on this Agreement or to such other address as a partner

may specify in a notice to all other partners.

17. Each of the partners hereby represents and warrants to each

other partner and to the Partnership that the partner is acquiring an

interest in the Partnership for investment purposes only, and not with a

view to resale.

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IN WITNESS WHEREOF, each of the parties has signed this

agreement.

___________________________

B. [1.81] Pre-Organization Subscription Agreement

PRE-ORGANIZATION SUBSCRIPTION AGREEMENT

WHEREAS, it is proposed to organize under the Illinois Business

Corporation Act of 1983, as amended, a corporation to be known as

_________________________ or by such other name as the incorporator

may select; and

WHEREAS, the corporation shall initially be authorized to issue

________ shares of common stock, having a par value of $__________ per

share; and

WHEREAS, it is proposed that said corporation shall be organized

to carry on and conduct any lawful act or activity for which corporations

may be organized under the Illinois Business Corporation Act of 1983, as

amended;

NOW, THEREFORE, I, the undersigned, subscribe for the number

of shares of said proposed corporation at the consideration set opposite

my name at the end of this Agreement.

This subscription shall be paid at such time or times as the Board of

Directors of said corporation may determine.

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The subscriber may act as incorporator of said corporation and may

execute and file Articles of Incorporation containing such provisions not

inconsistent herewith as may be deemed advisable by the subscriber. The

subscription hereby made shall be deemed to be accepted by the

corporation immediately upon the filing and recording of the Articles of

Incorporation as provided by law.

The undersigned agrees that each certificate representing shares of

the common stock of the corporation to be originally issued pursuant to

this Pre-Organization Subscription Agreement shall bear the following

legend:

“These securities have not been registered under the

Securities Act of 1933. They may not be sold or offered for sale

in the absence of an effective registration statement as to the

securities under that Act, or an opinion from counsel satisfactory

to the Company that such registration is not required.”

The undersigned agrees that the par value of one share of the common

stock of ____________________ is $__________.

Consideration

Name Number of Shares Subscribed

________________________ ____________ ____________

Date: ____________, 20__ ____________________________

Print Name __________________

C. [1.82] Bylaws

NOTE: The indemnification provisions contained in Article XI of these

bylaws have been modeled on the statutory indemnification provisions

contained in the Business Corporation Act of 1983. 805 ILCS 5/8.75. One

additional clause, clarifying applicability to former directors and officers, has

been added in brackets, and other amplifications or deletions may be

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appropriate in a particular case. Some practitioners prefer to keep the

indemnification provisions of the bylaws quite simple and state only that the

corporation shall indemnify all officers and directors to the fullest extent

permitted by law. Before adopting this approach, however, counsel should be

familiar with the corresponding indemnification provisions in the BCA so that

both counsel and the client can fully understand the impact of making this

general statement. A 2012 amendment to §8.75 provides that a right to

indemnity arising under the articles of incorporation or bylaws of a

corporation cannot be eliminated or impaired by amending the articles or

bylaws after the occurrence of the act or omission that gave rise to the

indemnity claim unless the articles or bylaws specifically stated that those

indemnity rights could be taken away or reduced. This form includes such a

provision in brackets. When drafting bylaws, compare wording on

indemnification to the actual, current wording of the corresponding statute to

ensure that it is consistent (or that any inconsistencies are intended).

BYLAWS

____________

ARTICLE I: OFFICES

The corporation shall continuously maintain in the State of Illinois a

registered office and a registered agent whose business office is identical

with such registered office and may have other offices within or without

the state.

ARTICLE II: SHAREHOLDERS

SECTION 1. ANNUAL MEETING. An annual meeting of the

shareholders shall be held on the ____________ of each year or at such

time as the board of directors may designate for the purpose of electing

directors and for the transaction of such other business as may come

before the meeting. If the day fixed for the annual meeting shall be a legal

holiday, such meeting shall be held on the next succeeding business day.

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SECTION 2. SPECIAL MEETINGS. Special meetings of the

shareholders may be called either by the president, by the board of

directors, or by the holders of not less than one fifth of all the outstanding

shares of the corporation entitled to vote, for the purpose or purposes

stated in the call of the meeting.

SECTION 3. PLACE OF MEETING. The board of directors may

designate any place as the place of meeting for any annual meeting or for

any special meeting called by the board of directors. If no designation is

made or if a special meeting is otherwise called, the place of meeting shall

be at the offices of the corporation.

SECTION 4. NOTICE OF MEETINGS. Written notice stating the

place, date, and hour of the meeting and, in the case of a special meeting,

the purpose or purposes for which the meeting is called, shall be delivered

not less than [10] nor more than [60] days before the date of the meeting,

or in the case of a merger, consolidation, share exchange, dissolution, sale,

lease, or exchange of assets, not less than [20] nor more than [60] days

before the date of the meeting, either personally or by mail, or by the

direction of the president, secretary, or the officer or persons calling the

meeting, to each shareholder of record entitled to vote at such meeting. If

mailed, such notice shall be deemed to be delivered when deposited in the

United States mail, addressed to the shareholder at his or her address as

it appears on the records of the corporation, with postage thereon

prepaid. When a meeting is adjourned to another time or place, notice

need not be given of the adjourned meeting if the time and place thereof

are announced at the meeting at which the adjournment is taken.

SECTION 5. FIXING OF RECORD DATE. For the purpose of

determining the shareholders entitled to notice of or to vote at any

meeting of shareholders, or shareholders entitled to receive payment of

any dividend, or in order to make a determination of shareholders for

any other proper purpose, the board of directors of the corporation may

fix in advance a date as the record date for any such determination of

shareholders, such date in any case to be not more than [60] days and, for

a meeting of shareholders, not less than [10] days, or in the case of a

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merger, consolidation, share exchange, dissolution, or sale, lease, or

exchange of assets, not less than [20] days, before the date of such

meeting. If no record date is fixed for the determination of shareholders

entitled to notice of or to vote at a meeting of shareholders, or

shareholders entitled to receive payment of a dividend, the date on which

notice of the meeting is mailed or the date on which the resolution of the

board of directors declaring such dividend is adopted, as the case may be,

shall be the record date for such determination of shareholders. A

determination of shareholders shall apply to any adjournment of the

meeting.

SECTION 6. VOTING LISTS. The officer or agent having charge of

the transfer book for shares of the corporation shall make, within [20]

days after the record date for a meeting of shareholders or [10] days

before such meeting, whichever is earlier, a complete list of the

shareholders entitled to vote at such meeting, arranged in alphabetical

order, with the address of and the number of shares held by each; which

list, for a period of [10] days prior to such meeting, shall be kept on file

at the registered office of the corporation and shall be subject to

inspection by any shareholder, and to copying at the shareholder’s

expense, at any time during usual business hours. Such list also shall be

produced and kept open at the time and place of the meeting and shall be

subject to the inspection of any shareholder during the whole time of the

meeting. The original share ledger or transfer book, or a duplicate

thereof kept in the State of Illinois, shall be prima facie evidence as to

who are the shareholders entitled to examine such list or share ledger or

transfer book or to vote at any meeting of shareholders.

SECTION 7. QUORUM. Unless otherwise provided in the articles of

incorporation, a majority of the outstanding shares of the corporation

entitled to vote on a matter represented in person or by proxy, shall

constitute a quorum for consideration of such matter at any meeting of

shareholders, but in no event shall a quorum consist of less than one third

of the outstanding shares so entitled to vote; provided that if less than a

majority of the outstanding shares are represented at said meeting, a

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majority of the shares so represented may adjourn the meeting at any

time without further notice. If a quorum is present, the affirmative vote

of the majority of the shares represented at the meeting and entitled to

vote on a matter shall be the act of the shareholders unless the vote of a

greater number or voting by classes is required by the Business

Corporation Act of 1983, the articles of incorporation, or these bylaws.

At any adjourned meeting at which a quorum shall be present, any

business may be transacted that might have been transacted at the

original meeting. Withdrawal of shareholders from any meeting shall not

cause failure of a duly constituted quorum at that meeting.

SECTION 8. PROXIES. Each shareholder may appoint a proxy to

vote or otherwise act for that shareholder by signing an appointment

form and delivering it to the person so appointed. No such proxy shall be

valid after 11 months from the date of its execution unless otherwise

provided in the proxy.

SECTION 9. VOTING OF SHARES. Each outstanding share,

regardless of class, shall be entitled to one vote in each matter submitted

to a vote at a meeting of shareholders. In all elections for directors, every

shareholder shall have the right to vote the number of shares owned by

such shareholder for as many persons as there are directors to be elected

multiplied by the number of such shares or to distribute such cumulative

votes in any proportion among any number of candidates. Each

shareholder may vote either in person or by proxy as provided in Section

SECTION 10. VOTING OF SHARES BY CERTAIN HOLDERS.

Shares registered in the name of another corporation, domestic or

foreign, may be voted by any officer, agent, proxy, or any other legal

representative authorized to vote such shares under the law of

incorporation of such corporation.

Shares registered in the name of a deceased person, a minor ward, or

a person under legal disability may be voted by an administrator,

executor, or court-appointed guardian, either in person or by proxy,

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without a transfer of such shares into the name of such administrator,

executor, or court-appointed guardian. Shares registered in the name of

a trustee may be voted by the trustee either in person or by proxy.

Shares registered in the name of a receiver may be voted by such

receiver, and shares held by or under the control of a receiver may be

voted by such receiver without the transfer thereof into the receiver’s

name if authority to do so is contained in an appropriate order of the

court by which such receiver was appointed.

A shareholder whose shares are pledged shall be entitled to vote such

shares until the shares have been transferred into the name of the

pledgee, and thereafter the pledgee shall be entitled to vote the shares so

transferred.

Any number of shareholders may create a voting trust for the

purpose of conferring on a trustee or trustees the right to vote or

otherwise represent their shares, for a period not to exceed 10 years, by

entering into a written voting trust agreement specifying the terms and

conditions of the voting trust, and by transferring their shares to such

trustee or trustees for the purpose of the agreement. Any such trust

agreement shall not become effective until a counterpart of the agreement

is deposited with the corporation at its registered office. The counterpart

of the voting trust agreement so deposited with the corporation shall be

subject to the same right of examination by a shareholder of the

corporation, in person or by agent or attorney, as are the books and

records of the corporation, and shall be subject to examination by any

holder of a beneficial interest in the voting trust, either in person or by

agent or attorney, at any reasonable time for any proper purpose.

Shares of its own stock belonging to this corporation shall not be

voted, directly or indirectly, at any meeting and shall not be counted in

determining the total number of outstanding shares at any given time,

but shares of its own stock held by it in a fiduciary capacity may be voted

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and shall be counted in determining the total number of outstanding

shares at any given time.

SECTION 11. INSPECTORS. At any meeting of shareholders, the

presiding officer may, or upon the request of any shareholder shall,

appoint one or more persons as inspectors for such meeting.

Such inspectors shall ascertain and report the number of shares

represented at the meeting based on their determination of the validity

and effect of proxies, count all votes and report the results, and do such

other acts as are proper to conduct the election and voting with

impartiality and fairness to all the shareholders.

Each report of an inspector shall be in writing and signed by the

inspector or by a majority of them if there is more than one inspector

acting at such meeting. If there is more than one inspector, the report of

a majority shall be the report of the inspectors. The report of the

inspector or inspectors on the number of shares represented at the

meeting and the results of the voting shall be prima facie evidence thereof.

SECTION 12. INFORMAL ACTION BY SHAREHOLDERS. Any

action required to be taken at a meeting of the shareholders, or any other

action which may be taken at a meeting of the shareholders, may be taken

without a meeting and without a vote if a consent in writing setting forth

the action so taken shall be signed (a) by the holders of outstanding shares

having not less than the minimum number of votes that would be

necessary to authorize or take such action at a meeting at which all shares

entitled to vote thereon were present and voting, provided that all

shareholders who are entitled to vote on the matters in question have

received written notice of the proposed action at least five days prior to

execution of the consent, or (b) by all the shareholders entitled to vote

with respect to the subject matter thereof.

Prompt notice of the taking of the corporate action without a meeting

by less than unanimous written consent shall be given in writing to those

shareholders who have not consented in writing. In the event that the

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action consented to is such as would have required the filing of a

certificate under any section of the Business Corporation Act if such

action had been voted on by the shareholders at a meeting thereof, the

certificate filed under such section shall state, in lieu of any statement

required by such section concerning any vote of shareholders, that

written consent has been given in accordance with the provisions of §7.10

of the Business Corporation Act and that written notice has been given

as provided in such §7.10.

SECTION 13. VOTING BY BALLOT. Voting on any question or in

any election may be by voice unless the presiding officer shall order or

any shareholder shall demand that voting be by ballot.

ARTICLE III: DIRECTORS

SECTION 1. GENERAL POWERS. The business of the corporation

shall be managed by or under the direction of its board of directors.

SECTION 2. NUMBER, TENURE, AND QUALIFICATIONS. The

number of directors of the corporation shall be _____. Each director shall

hold office until the next annual meeting of shareholders or until that

director’s successor shall have been elected and qualified. Directors need

not be residents of Illinois or shareholders of the corporation. The

number of directors may be increased or decreased from time to time by

the amendment of this section. No decrease shall have the effect of

shortening the term of any incumbent director.

SECTION 3. REGULAR MEETINGS. A regular meeting of the

board of directors shall be held without other notice than this bylaw

immediately after the annual meeting of shareholders. The board of

directors may provide, by resolution, the time and place for holding

additional regular meetings without other notice than such resolution.

SECTION 4. SPECIAL MEETINGS. Special meetings of the board

of directors may be called by or at the request of the president or any

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_____ directors. The person or persons authorized to call special meetings

of the board of directors may fix any place as the place for holding any

special meeting of the board of directors called by them.

SECTION 5. NOTICE. Notice of any special meeting shall be given

at least two days previous thereto by written notice to each director at the

director’s business address. If mailed, such notice shall be deemed to be

delivered when deposited in the United States mail so addressed, with

postage thereon prepaid. If notice is given by e-mail, such notice shall be

deemed to be delivered when the sender has received confirmation of

receipt of the e-mail by the recipient. The attendance of a director at any

meeting shall constitute a waiver of notice of such meeting, except when

a director attends a meeting for the express purpose of objecting to the

transaction of any business because the meeting is not lawfully called or

convened. Neither the business to be transacted at, nor the purpose of,

any regular or special meeting of the board of directors need be specified

in the notice or waiver of notice of such meeting.

SECTION 6. QUORUM. A majority of the number of directors fixed

by these bylaws shall constitute a quorum for transaction of business at

any meeting of the board of directors, provided that if less than a majority

of such number of directors are present at said meeting, a majority of the

directors present may adjourn the meeting at any time without further

notice.

SECTION 7. MANNER OF ACTING. The act of the majority of the

directors present at a meeting at which a quorum is present shall be the

act of the board of directors unless the act of a greater number is required

by statute, these bylaws, or the articles of incorporation.

SECTION 8. VACANCIES. Any vacancy on the board of directors

may be filled by election at the next annual or special meeting of

shareholders. A majority of the board of directors may fill any vacancy

prior to such annual or special meeting of shareholders.

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SECTION 9. RESIGNATION AND REMOVAL OF DIRECTORS.

A director may resign at any time upon written notice to the board of

directors, its chairperson, the president, or secretary of the corporation.

A director may be removed with or without cause by a majority of

shareholders if the notice of the meeting names the director or directors

to be removed at said meeting.

SECTION 10. INFORMAL ACTION BY DIRECTORS. The

authority of the board of directors may be exercised without a meeting if

a consent in writing, setting forth the action taken, is signed by all the

directors entitled to vote.

SECTION 11. COMPENSATION. The board of directors, by the

affirmative vote of a majority of directors then in office, and irrespective

of any personal interest of any of its members, shall have authority to

establish reasonable compensation of all directors for services to the

corporation as directors, officers, or otherwise notwithstanding any

director conflict of interest. By resolution of the board of directors, the

directors may be paid their expenses, if any, of attendance at each

meeting of the board. No such payment previously mentioned in this

section shall preclude any director from serving the corporation in any

other capacity and receiving compensation therefor.

SECTION 12. PRESUMPTION OF ASSENT. A director of the

corporation who is present at a meeting of the board of directors at which

action on any corporate matter is taken shall be conclusively presumed

to have assented to the action taken unless such director’s dissent shall be

entered in the minutes of the meeting, or unless such director shall file a

written dissent to such action with the person acting as the secretary of

the meeting before the adjournment thereof or shall forward such dissent

by registered or certified mail to the secretary of the corporation

immediately after the adjournment of the meeting. Such right to dissent

shall not apply to a director who voted in favor of such action.

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SECTION 13. COMMITTEES. A majority of the board of directors

may create one or more committees of two or more members to exercise

appropriate authority of the board of directors. A majority of such

committee shall constitute a quorum for transaction of business. A

committee may transact business without a meeting by unanimous

written consent.

SECTION 14. TRANSACTIONS WITH DIRECTORS. In

compliance with §8.60 of the Business Corporation Act of 1983, no

contract or other transaction between the corporation and one or more

of its directors, or any other corporation, firm, association, or entity in

which one or more of its directors are directors or officers or are

financially interested, shall be either void or voidable because of such

relationship or interest or because such director or directors are present

at the meeting of the board of directors or a committee thereof that

authorizes, approves, or ratifies such contract or transaction or because

the director’s or directors’ votes are counted for such purpose, if the

contract or transaction is fair to the corporation and

a. the material facts of the transaction and such relationship or

interest are disclosed or known to the board of directors or

committee that authorizes, approves, or ratifies the contract or

transaction by the affirmative votes of a majority of disinterested

directors, even though the disinterested directors be less than a

quorum; or

b. the material facts of the transaction and such relationship or

interest are disclosed or known to the shareholders entitled to

vote and they authorize, approve, or ratify such contract or

transaction without counting the vote of any shareholder who is

an interested director.

Common or interested directors may be counted in determining the

presence of a quorum at a meeting of the board of directors or a

committee thereof that authorizes, approves, or ratifies such contract or

transaction but may not be counted when the board of directors or a

committee thereof takes action on the contract or transaction.

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ARTICLE IV: OFFICERS

SECTION 1. NUMBER. The officers of the corporation shall be a

president, one or more vice presidents, a treasurer, a secretary, and such

other officers as may be elected or appointed by the board of directors.

Any two or more offices may be held by the same person.

SECTION 2. ELECTION AND TERM OF OFFICE. The officers of

the corporation shall be elected annually by the board of directors at the

first meeting of the board of directors held after each annual meeting of

shareholders. If the election of officers shall not be held at such meeting,

such election shall be held as soon thereafter as possible. Vacancies may

be filled or new offices created and filled at any meeting of the board of

directors. Each officer shall hold office until that officer’s successor shall

have been duly elected and shall have been qualified, or until that

officer’s death, or until that officer shall resign or shall have been

removed in the manner hereinafter provided. Election of an officer shall

not of itself create contract rights.

SECTION 3. REMOVAL. Any officer may be removed by the board

of directors whenever in its judgment the best interests of the corporation

would be served thereby, but such removal shall be without prejudice to

the contract rights, if any, of the person so removed.

SECTION 4. THE PRESIDENT. The president shall be the principal

executive officer of the corporation. Subject to the direction and control

of the board of directors, the president shall be in charge of the business

of the corporation; the president shall see that the resolutions and

directions of the board of directors are carried into effect except in those

instances in which that responsibility is specifically assigned to some

other person by the board of directors; and, in general, the president shall

discharge all duties incident to the office of president and such other

duties as may be prescribed by the board of directors from time to time.

The president shall preside at all meetings of the shareholders and of the

board of directors. Except in those instances in which the authority to

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execute is expressly delegated to another officer or agent of the

corporation or a different mode of execution is expressly prescribed by

the board of directors or these bylaws, the president may execute for the

corporation certificates for its shares, and any contracts, deeds,

mortgages, bonds, or other instruments that the board of directors has

authorized to be executed, and the president may accomplish such

execution individually or with the secretary, any assistant secretary, or

any other officer thereunto authorized by the board of directors,

according to the requirements of the form of the instrument. The

president may vote all securities of the corporation entitled to vote, except

as and to the extent such authority shall be vested in a different officer or

agent of the corporation by the board of directors.

SECTION 5. THE VICE PRESIDENTS. The vice president (or, in

the event there is more than one vice president, each of the vice

presidents) shall assist the president in the discharge of such duties as the

president may direct and shall perform such other duties as from time to

time may be assigned to the vice president by the president or by the

board of directors. In the absence of the president or in the event of the

president’s inability or refusal to act, the vice president (or, in the event

there is more than one vice president, the vice presidents in the order

designated by the board of directors, or by the president if the board of

directors has not made such a designation, or, in the absence of any

designation, then in the order of seniority of tenure as vice president)

shall perform the duties of the president, and when so acting, shall have

all the powers of and be subject to all the restrictions on the president.

Except in those instances in which the authority to execute is expressly

delegated to another officer or agent of the corporation or a different

mode of execution is expressly prescribed by the board of directors or

these bylaws, the vice president (or each of them if there are more than

one) may execute for the corporation certificates for its shares and any

contracts, deeds, mortgages, bonds, or other instruments that the board

of directors has authorized to be executed; the vice president may

accomplish such execution either individually or with the secretary, any

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assistant secretary, or any other officer thereunto authorized by the

board of directors, according to the requirements of the form of the

instrument.

SECTION 6. THE TREASURER. The treasurer shall be the

principal accounting and financial officer of the corporation. The

treasurer shall (a) have charge of and be responsible for the maintenance

of adequate books of account for the corporation; (b) have charge and

custody of all funds and securities of the corporation, and be responsible

therefor and for the receipt and disbursement thereof; and (c) perform

all the duties incident to the office of treasurer and such other duties as

from time to time may be assigned to the treasurer by the president or by

the board of directors. If required by the board of directors, the treasurer

shall give a bond for the faithful discharge of the treasurer’s duties in

such sum and with such surety or sureties as the board of directors may

determine.

SECTION 7. THE SECRETARY. The secretary shall (a) record the

minutes of the shareholder’s meetings and the board of directors’

meetings in one or more books provided for that purpose; (b) see that all

notices are duly given in accordance with the provisions of these bylaws

and as required by law; (c) be custodian of the corporate records of the

corporation; (d) keep a register of the post office address of each

shareholder, which shall be furnished to the secretary by such

shareholder; (e) sign with the president, or a vice president, or any other

officer thereunto authorized by the board of directors, certificates for

shares of the corporation, the issue of which shall have been authorized

by the board of directors, and any contracts, deeds, mortgages, bonds, or

other instruments the board of directors have authorized to be executed,

according to the requirements of the form of the instrument, except when

a different mode of execution is expressly prescribed by the board of

directors or these bylaws; (f) have general charge of the stock transfer

books of the corporation; (g) have authority to certify the bylaws,

resolutions of shareholders and the board of directors and committees

thereof, and other documents of the corporation as true and correct

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copies thereof; and (h) perform all duties incident to the office of

secretary and such other duties as from time to time may be assigned to

the secretary by the president or by the board of directors.

SECTION 8. THE ASSISTANT TREASURERS AND ASSISTANT

SECRETARIES. The assistant treasurers and assistant secretaries shall

perform such duties as shall be assigned to them by the treasurer or the

secretary, respectively, or by the president or the board of directors. The

assistant secretaries may sign with the president, or a vice president, or

any other officer thereunto authorized by the board of directors,

certificates for shares of the corporation, the issue of which shall have

been authorized by the board of directors, and any contracts, deeds,

mortgages, bonds, or other instruments the board of directors has

authorized to be executed, according to the requirements of the form of

the instrument, except when a different mode of execution is expressly

prescribed by the board of directors or these bylaws. The assistant

treasurers shall respectively, if required by the board of directors, give

bonds for the faithful discharge of their duties in such sums and with such

sureties as the board of directors shall determine.

SECTION 9. SALARIES. The salaries of the officers shall be fixed

from time to time by the board of directors, and no officer shall be

prevented from receiving such salary by reason of the fact that the officer

is also a director of the corporation.

ARTICLE V: CONTRACTS, LOANS, CHECKS, AND DEPOSITS

SECTION 1. CONTRACTS. The board of directors may authorize

any officer or officers or agent or agents to enter into any contract or

execute and deliver any instrument in the name of and on behalf of the

corporation. Such authority may be general or confined to specific

instances.

SECTION 2. LOANS. No loans shall be contracted on behalf of the

corporation, and no evidences of indebtedness shall be issued in its name

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unless authorized by a resolution of the board of directors. Such

authority may be general or confined to specific instances.

SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts, or other

orders for the payment of money, notes, or other evidences of

indebtedness issued in the name of the corporation shall be signed by such

officer or officers or agent or agents of the corporation and in such

manner as shall from time to time be determined by resolution of the

board of directors.

SECTION 4. DEPOSITS. All funds of the corporation not otherwise

employed shall be deposited from time to time to the credit of the

corporation in such banks, trust companies, or other depositories as the

board of directors may select.

ARTICLE VI: SHARES AND THEIR TRANSFER

SECTION 1. SHARES REPRESENTED BY CERTIFICATES AND

UNCERTIFICATED SHARES. Shares either shall be represented by

certificates or shall be uncertificated shares.

Certificates representing shares of the corporation shall be signed by

the appropriate officers. If a certificate is countersigned by a transfer

agent or registrar other than the corporation or its employee, any other

signatures may be facsimile. Each certificate representing shares shall be

consecutively numbered or otherwise identified and also shall state the

name of the person to whom issued, the number and class of shares (with

designation of series, if any), the date of issue, and that the corporation is

organized under Illinois law. If the corporation is authorized to issue

shares of more than one class or of a series within a class, the certificate

also shall contain such information or statements as may be required by

law.

Unless prohibited by the articles of incorporation, the board of

directors may provide by resolution that some or all of any class or series

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of shares shall be uncertificated shares. Any such resolution shall not

apply to shares represented by a certificate until the certificate has been

surrendered to the corporation. Within a reasonable time after the

issuance or transfer of uncertificated shares, the corporation shall send

the registered owner thereof a written notice of all information that

would appear on a certificate. Except as otherwise expressly provided by

law, the rights and obligations of the holders of uncertificated shares shall

be identical to those of the holders of certificates representing shares of

the same class and series.

The name and address of each shareholder, the number and class of

shares held, and the date on which the shares were issued shall be entered

on the books of the corporation. The person in whose name shares stand

on the books of the corporation shall be deemed the owner thereof for all

purposes regarding the corporation.

SECTION 2. LOST CERTIFICATES. If a certificate representing

shares has allegedly been lost or destroyed, the board of directors may in

its discretion, except as may be required by law, direct that a new

certificate be issued upon such indemnification and other reasonable

requirements as it may impose.

SECTION 3. TRANSFERS OF SHARES. Transfer of shares of the

corporation shall be recorded on the books of the corporation. Transfer

of shares represented by a certificate, except in the case of a lost or

destroyed certificate, shall be made upon surrender for cancellation of

the certificate for such shares. A certificate presented for transfer must

be duly endorsed and accompanied by proper guaranty of signature and

other appropriate assurances that the endorsement is effective. Transfer

of an uncertificated share shall be made on receipt by the corporation of

an instruction from the registered owner or other appropriate person.

The instruction shall be in writing or a communication in such form as

may be agreed on in writing by the corporation.

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ARTICLE VII: FISCAL YEAR

The fiscal year of the corporation shall be fixed by resolution of the

board of directors.

ARTICLE VIII: DISTRIBUTIONS

The board of directors may authorize, and the corporation may

make, distributions to its shareholders, subject to any restrictions in its

articles of incorporation or provided by law.

ARTICLE IX: SEAL

The corporation shall not have a seal.

ARTICLE X: WAIVER OF NOTICE

Whenever any notice is required to be given under the provisions of

these bylaws or under the provisions of the articles of incorporation or

under the provisions of the Business Corporation Act of 1983, a waiver

thereof in writing, signed by the person or persons entitled to such notice,

whether before or after the time stated therein, shall be deemed

equivalent to the giving of such notice. Attendance at any meeting shall

constitute waiver of notice thereof unless the person at the meeting

objects to the holding of the meeting because proper notice was not given.

ARTICLE XI: INDEMNIFICATION OF OFFICERS,

DIRECTORS, EMPLOYEES, AND AGENTS

SECTION 1. Subject to the other provisions of this Article XI, the

corporation shall indemnify any person who was or is a party or is

threatened to be made a party to any threatened, pending, or completed

action, suit, or proceeding, whether civil, criminal, administrative, or

investigative (other than an action by or in the right of the corporation)

by reason of the fact that such person is or was a director, officer,

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employee, or agent of the corporation, or who is or was serving at the

request of the corporation as a director, officer, employee, or agent of

another corporation, partnership, joint venture, trust, or other

enterprise, against expenses (including attorneys’ fees), judgments, fines,

and amounts paid in settlement actually and reasonably incurred by such

person in connection with such action, suit, or proceeding if such person

acted in good faith and in a manner such person reasonably believed to

be in, or not opposed to, the best interests of the corporation, and, with

respect to any criminal action or proceeding, had no reasonable cause to

believe such person’s conduct was unlawful. The termination of any

action, suit, or proceeding by judgment, order, settlement, conviction, or

plea of nolo contendere or its equivalent shall not, of itself, create a

presumption that the person did not act in good faith and in a manner

that such person reasonably believed to be in or not opposed to the best

interests of the corporation or, with respect to any criminal action or

proceeding, that the person had reasonable cause to believe that such

person’s conduct was unlawful.

SECTION 2. Subject to the other provisions of this Article XI, the

corporation shall indemnify any person who was or is a party or is

threatened to be made a party to any threatened, pending, or completed

action or suit by or in the right of the corporation to procure a judgment

in its favor by reason of the fact that such person is or was a director,

officer, employee, or agent of the corporation, or is or was serving at the

request of the corporation as a director, officer, employee, or agent of

another corporation, partnership, joint venture, trust, or other

enterprise, against expenses (including attorneys’ fees) actually and

reasonably incurred by such person in connection with the defense or

settlement of such action or suit, if such person acted in good faith and in

a manner such person reasonably believed to be in, or not opposed to, the

best interests of the corporation, provided that no indemnification shall

be made in respect of any claim, issue, or matter as to which such person

shall have been adjudged to be liable to the corporation, unless, and only

to the extent that the court in which such action or suit was brought shall

determine upon application that, despite the adjudication of liability, but

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in view of all the circumstances of the case, such person is fairly and

reasonably entitled to indemnity for such expenses as the court shall deem

proper.

SECTION 3. To the extent that a present or former director, officer,

or employee of a corporation has been successful, on the merits or

otherwise, in the defense of any action, suit, or proceeding referred to in

Sections 1 and 2 of this Article XI, or in defense of any claim, issue, or

matter therein, such person shall be indemnified against expenses

(including attorneys’ fees) actually and reasonably incurred by such

person in connection therewith, if the person acted in good faith and in a

manner such person reasonably believed to be in, or not opposed to, the

best interests of the corporation.

SECTION 4. Any indemnification under Sections 1, 2, or 3 of this

Article XI (unless ordered by a court) shall be made by the corporation

only as authorized in the specific case, upon a determination that

indemnification of the present or former director, officer, or employee is

proper in the circumstances because such person has met the applicable

standard of conduct set forth in Sections 1, 2, or 3 of this Article XI. Such

determination shall be made with respect to a person who is a director or

officer of the corporation at the time of the determination: (a) by the

majority vote of the directors who are not parties to such action, suit, or

proceeding, even though less than a quorum; (b) by a committee of such

directors, even though less than a quorum, designated by a majority vote

of such directors; (c) if there are no such directors, or if such directors so

direct, by independent legal counsel in a written opinion; or (d) by the

shareholders.

SECTION 5. Expenses (including attorneys’ fees) incurred by an

officer or director of the corporation in defending a civil or criminal

action, suit, or proceeding may be paid by the corporation in advance of

the final disposition of such action, suit, or proceeding, as authorized by

the board of directors in the specific case, upon receipt of an undertaking

by or on behalf of such director or officer to repay such amount if it shall

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ultimately be determined that such person is not entitled to be

indemnified by the corporation as authorized in this Article XI. Such

expenses (including attorneys’ fees) incurred by former directors and

officers or other employees and agents of the corporation or by persons

serving at the request of the corporation as directors, officers, employees,

or agents of another corporation, partnership, joint venture, trust, or

other enterprise may be so paid on such terms and conditions, if any, as

the corporation deems appropriate.

SECTION 6. The indemnification and advancement of expenses

provided by or granted under this Article XI shall not be deemed

exclusive of any other rights to which those seeking indemnification may

be entitled under any bylaw, agreement, vote of shareholders or

disinterested directors, or otherwise, both as to action in an official

capacity and as to action in another capacity while holding such office

[and shall, unless otherwise provided when authorized or ratified, continue as

to a person who has ceased to be a director, officer, employee, or agent, and

shall inure to the benefit of the heirs, executors, and administrators of such

person]. [The corporation shall have the right to alter, reduce, or eliminate any

of the indemnity provisions described in these bylaws at any time and from

time to time. Without limiting the generality of the preceding statement, the

corporation shall have the right to alter, reduce, or eliminate any indemnity

provision after the occurrence of the act or omission giving rise to the claim

for indemnification.]

SECTION 7. The corporation shall have power to purchase and

maintain insurance on behalf of any person who is or was a director,

officer, employee, or agent of the corporation, or who is or was serving at

the request of the corporation as a director, officer, employee, or agent of

another corporation, partnership, joint venture, trust, or other

enterprise, against any liability asserted against such person and

incurred by such person in any such capacity, or arising out of his or her

status as such, regardless of whether the corporation would have the

power to indemnify such person against such liability under the

provisions of this Article XI.

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SECTION 8. If the corporation has paid indemnity or has advanced

expenses to a director, officer, employee, or agent, the corporation shall

report the indemnification or advance in writing to the shareholders with

or before the notice of the next shareholders’ meeting.

SECTION 9. References to “the corporation” in this Article shall

include, in addition to the surviving corporation, any merging

corporation (including any corporation having merged with a merging

corporation) absorbed in a merger that otherwise would have lawfully

been entitled to indemnify its directors, officers, and employees or agents.

References in this Article to “other enterprises” shall include employee

benefit plans of the corporation and its affiliates. References in this

Article to “fines” shall include any excise taxes assessed on a person with

respect to an employee benefit plan. References in this Article to “serving

at the request of the corporation” shall include any service as a director,

officer, employee, or agent of the corporation which imposes duties on, or

involves services by, such director, officer, employee, or agent with

respect to an employee benefit plan of the corporation (or one of its

affiliates), its participants, or beneficiaries. A person who acted in good

faith and in a manner reasonably believed to be in the best interest of the

participants and beneficiaries of an employee benefit plan shall be

deemed to have acted in a manner “not opposed to the best interest of the

corporation” as referred to in this Article.

ARTICLE XII: AMENDMENTS

Unless the power to make, alter, amend, or repeal the bylaws is

reserved to the shareholders by the articles of incorporation, the bylaws

of the corporation may be made, altered, amended, or repealed by the

shareholders or the board of directors, but no bylaws adopted by the

shareholders may be altered, amended, or repealed by the board of

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directors. The bylaws may contain any provisions for the regulation and

management of the affairs of the corporation not inconsistent with law or

the articles of incorporation.

D. [1.83] Call and Waiver of Notice of First Meeting of

Shareholders (with Minutes of First Meeting of

Shareholders)

CALL AND WAIVER OF NOTICE OF FIRST MEETING OF

SHAREHOLDERS OF

____________ CORPORATION

The undersigned, constituting all the incorporators and shareholders

of ____________ Corporation, an Illinois corporation, hereby call the

first meeting of shareholders of said corporation, to be held at

____________, on the _____ day ____________, 20__, at the hour of _____

[a.m.] [p.m.], for the purpose of electing directors and transacting such

other business as may come before the meeting, and hereby waive all

notice of such meeting, whether provided by statute or otherwise.

Dated ____________, 20__.

____________________________

MINUTES OF FIRST MEETING OF

SHAREHOLDERS OF

____________ CORPORATION

The first meeting of the shareholders of ____________ Corporation,

an Illinois corporation, was held at ____________, in the city of

____________, Illinois, on ____________, 20__, at the hour of _____ [a.m.]

[p.m.], pursuant to call by the incorporators and waiver of notice by all

the shareholders.

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Upon motion duly made, seconded, and unanimously carried,

____________ was chosen as chair of the meeting and ____________ was

chosen as secretary of the meeting.

The following shareholders were present in person:

Name Number of Shares

____________ ____________

The secretary reported that all the shareholders of the Corporation

were present in person, thus constituting a quorum.

The chair reported that the Secretary of State of Illinois had filed the

articles of incorporation of the Corporation in [his] [her] office on

____________, 20__, and had issued a certificate of incorporation on that

date.

The subscription agreement covering all existing subscriptions to the

shares of the Corporation, and the articles of incorporation of the

Corporation as filed in the office of the Secretary of State, were presented

to the meeting. On motion duly made, seconded, and unanimously carried

it was

RESOLVED, that the pre-organization subscription agreement

covering the subscription to the shares of the Corporation be and the

same is hereby approved; and

FURTHER RESOLVED, that the Bylaws for the regulation of the

affairs of the Corporation inserted in the minute book immediately

following the copy of the articles of incorporation be and they are hereby

adopted; and

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FURTHER RESOLVED, that the form of buy-sell agreement

presented to this meeting be and it is hereby adopted and approved in all

respects, and the secretary is hereby directed to attach a copy of said buy-

sell agreement to the minutes of this meeting; and

[The following language is applicable to corporations making an “S”

election only.] [FURTHER RESOLVED, that the Corporation should

elect to be treated as a “small business corporation” under §1362 of the

Internal Revenue Code of 1986, for income tax purposes, and the

directors of the Corporation are hereby authorized and directed on

behalf of the Corporation to take such actions as they may deem

necessary or advisable to make such election.]

The chair of the meeting then stated that the articles of incorporation

provided for the election of __________ directors of the Corporation at

the first meeting of shareholders to hold office until the first annual

meeting of shareholders or until their respective successors shall be

elected and shall have qualified. The chair called for the nomination of

directors. Thereupon, the following persons were nominated for directors

of the Corporation, to serve until the first annual meeting of shareholders

or until their respective successors are elected and shall have qualified:

____________

No further nominations being made, the nominations were closed,

and the shareholders proceeded to vote on the nominees. The vote having

been taken and counted, the nominees were found to have received the

number of votes set opposite their respective names:

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Name Number of Votes

____________ ____________

____________, ____________, ____________, and ____________

were declared by the chair to be the duly elected directors of the

Corporation, to serve until the first annual meeting of shareholders or

until their respective successors are elected and shall have qualified.

There being no further or other business to come before the meeting,

the meeting was adjourned.

___________________________

Secretary of the Meeting

APPROVED:

____________

E. [1.84] Directors’ Action Pursuant to §8.45 of the Business

Corporation Act of 1983, as Amended

DIRECTOR’S ACTION PURSUANT TO §8.45

OF THE BUSINESS CORPORATION ACT OF 1983, AS AMENDED

The undersigned, being the sole director of ____________, an Illinois

corporation, does hereby declare and state, pursuant to §8.45 of the

Business Corporation Act of 1983, as amended, that [he] [she] consents to

and hereby adopts the following resolutions and takes the following

actions:

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BE IT RESOLVED, that the bylaws for the regulation of the affairs

of the Corporation, inserted in the minute book immediately following

the copy of the articles of incorporation and before this director’s action,

be and they are hereby adopted; and

FURTHER RESOLVED, that the following persons are duly elected

to the offices set forth before their respective names to serve for the term

provided by the bylaws:

President and Assistant

Secretary ____________

____________

Secretary, Treasurer, and

Vice President ____________

____________

FURTHER RESOLVED, that the certificate to represent the shares

of the Corporation be the same as the specimen certificate inserted in the

minute book of the corporation immediately following this director’s

action; and

FURTHER RESOLVED, that the officers of the corporation be and

they are hereby authorized and directed to pay all organization expenses

of the Corporation out of the funds of the Corporation and to deduct

expenditures ratably over such period as may be deemed permissible

under the Internal Revenue Code of 1986, as amended; and

WHEREAS, it is deemed advisable for the board of directors to

designate a bank as depository for the Corporation’s funds and for other

purposes;

BE IT RESOLVED, that the printed banking resolutions following

this director’s action be and they are hereby adopted; and

ORGANIZING AND ADVISING A SMALL BUSINESS §1.84

LLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 1 — 133

WHEREAS, prior to the filing of the articles of incorporation in the

office of the Secretary of State, a subscription to the shares of the

Corporation has been executed as follows:

Amount

Name

Number of Shares Subscribed

____________ ____________ ____________

WHEREAS, under the laws of the State of Illinois, the filing of the

articles of incorporation with the Secretary of State constitutes an

acceptance by the Corporation of all existing subscriptions to its shares;

and

WHEREAS, it is in order for the board of directors to determine the

time and manner of payment of such subscription;

BE IT RESOLVED, that the subscription to the shares of the

Corporation above described is hereby approved and consented to and

that the subscriber be requested to make full payment forthwith to the

treasurer of the Corporation for the shares; and

FURTHER RESOLVED, that the shares subscribed for shall be

issued for the consideration stated in the subscription agreement and that

when and as the subscriber shall make full payment to the treasurer of

the Corporation for the shares subscribed for by [him] [her] in accordance

with the subscription agreement heretofore accepted, the shares of said

subscriber shall be deemed fully paid and nonassessable; and

FURTHER RESOLVED, that, upon payment in full for such shares,

the proper officers of the Corporation shall execute and deliver to said

subscriber a certificate representing such shares. Such shares shall bear

the following legend:

§1.84 ELEMENTS OF ILLINOIS LAW: ORGANIZING AND ADVISING A SMALL BUSINESS

1 — 134

WWW.IICLE.COM

“These securities have not been registered under the Securities

Act of 1933. They may not be sold or offered for sale in the

absence of an effective registration statement as to the securities

under that Act, or an opinion from counsel satisfactory to the

company that such registration is not required.”

FURTHER RESOLVED, that the fiscal year of the Corporation shall

begin on the first day of January and end on the last day of December;

and

WHEREAS, the shareholders of the Corporation have indicated

their willingness to consent to the election of the Corporation to be treated

as a “small business corporation” under §1362 of the Internal Revenue

Code of 1986;

[The following language is applicable to corporations making an “S”

election only.][BE IT RESOLVED, that the Corporation should elect to

be treated as a “small business corporation” under §1362 of the Internal

Revenue Code of 1986 for income tax purposes, and the president is

hereby authorized and directed on behalf of the Corporation to execute

and file with the Internal Revenue Service a Form 2553 (Election by a

Small Business Corporation) in the form attached hereto, provided that

the requisite consent is obtained from the shareholders of the

corporation.]

IN WITNESS WHEREOF, I have executed this director’s action this

__________ day of ____________, 20__.

____________________________

Being the sole director of the Corporation.