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FAQs About Corporations

FAQs About Corporations

Q.  What is a “corporation”?

A.  A corporation is a type of business organization recognized by Illinois law.  Shares of stock evidence its ownership, and the owners are called “stockholders” or “shareholders.”

Q.  What are the benefits of incorporating a business?

A.  Corporations are popular for start-up businesses because they (1) allow multiple owners to pool their resources, and (2) protect the shareholders from personal liability.

Q.  How do I form a corporation in Illinois?

A.  The incorporator of a corporation must file “articles of incorporation” with the Illinois Secretary of State, and must pay a filing fee.  Most corporations also adopt “by-laws,” containing provisions to regulate and manage the affairs of the corporation.

Q.  What is a “shareholder agreement”?

A.  It is a written contract between all shareholders concerning the corporation’s management.  Many shareholder agreements include (1) restrictions on who can own stock in the company, and (2) “buy-sell” provision that govern the shareholders’ rights to sell stock in the corporation.

Q.  Who manages the corporation’s business?

A.  Illinois corporations generally have three classes of participants.  The shareholders typically elect a board of directors who manage the business and affairs of the corporation.  The directors then typically meet and appoint officers, who operate the corporation’s business on behalf of the board of directors.

Q.  Are shareholders, directors and/or officers liable for the corporation’s debts?

A.  Typically not.  A corporation creates a liability “shield,” which protects its shareholders, directors and officers.  However, Illinois law recognizes several important exceptions to this “corporate shield.”

Q.  How are corporations taxed?

A.  The answer to this question depends on the type of tax treatment chosen.  A “C corporation” must pay a corporate income tax on its profits.  By contrast, if the shareholders elect treatment as an “S corporation,” the entity does not pay separate corporate income taxes (much like a partnership).  The Internal Revenue Code limits when shareholders may elect “S corporation” status.

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