Illinois Corporations & Franchise Taxes

Illinois Corporation's Franchise Tax Calculations

Each domestic and foreign corporation is required to pay franchise tax at the time of filing its first report of issued shares (articles of Incorporation or application for authority) for the privilege of exercising its franchises in the State of Illinois. Additional franchise tax is payable to the Secretary of State whenever the corporation reports a change in its paid-in capitalhttps://www.illinoisregisteredagent.com/corporate-definitions over the amount last reported to the Secretary of State. Some of the documents that generate a change in paid-in capital are:

• a report of the issuance of additional shares;
• a report of an increase in paid-in capital without the issuance of additional shares;
• an amendment to the articles of incorporation increasing or decreasing the amount of shares the corporation is authorized to issue;
• a report of cumulative changes in paid-in capital;
• a statutory merger.

A Note to Foreign Qualifications

If you are a company incorporated in another state and filing an application for authority to do business in Illinois, and you indicate on your application that your company has done business in Illinois prior to the filing date of your application for authority, your company will be held responsible for the franchise tax dating back to the date your company began doing business in Illinois along with penalties and additional annual report filing fees for those previous years accumulated from the date you indicated as your first date of doing business in Illinois.

The Secretary of State will not file your application for authority unless the back taxes, filing fees and penalties are satisfied. You may want to review what constitutes doing business in Illinois if you feel you have had a presence in Illinois prior to filing for authority with the state. See our section on Foreign qualification that specifies how to figure your initial franchise taxes.

Calculating Your Franchise Tax

The Secretary of State gives you two options for calculating your franchise tax. You must select the appropriate option on your annual report. The least painful of the computations is to elect to pay franchise tax on the entire amount of paid-in capital. Of course your choice will be determined on the amount of paid in capital vs the amount of property and sales in Illinois. This option gives most incorporators the incentive to keep the paid-in capital (or par value per share) relatively low.

The Easy Calculation

The Annual Franchise Tax is computed at the rate of 1/10 of 1% (.10 of 1%) for the 12 month period commencing the first day of the anniversary month of the corporation on the proportion of its paid-in capital as of the last day of the third month preceding the anniversary month represented by the ratio of Illinois property and business to total property and business everywhere - minimum tax is $25.00 and maximum tax is $2,000,000. The state has this formula listed on the annual report so that all that is required is a data entry of the paid in capital to calculate the franchise tax.

The Not-So-Easy Calculation

The other choice for calculating your franchise tax is on the basis of the amount represented in this state of its paid-in capital on the last day of the third month preceding the anniversary month. The amount represented would be that portion of its paid-in capital that the sum of the value of its property located in this state (b-below) and the gross amount of business transacted by it or from businesses in this state (d-below), divided by the sum of the value of all of its property wherever located (a-below) and the gross amount of its business where ever transacted (c-below). There are exceptions of course and it is recommended to review the corporate statutes to verify which calculation you should follow.

Value of the property (gross assets):

(a) owned by the corporation, wherever located: ....................... (a) $ ____________

(b) of the corporation located within the State of Illinois: ......... (b) $ ____________

Gross amount of business transacted by the corporation:
(c) everywhere for the above period:............................................. (c) $ ____________

(d) at or from places of business in Illinois for the above period: (d) $ ____________

ALLOCATION FACTOR = b + d = _______________
a + c (6 decimal places)

These guidelines are also found on Illinois Registered Agent, Inc. website.

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Not-for-Profit Corporations are Not-So-Easy

Are you thinking of forming a not-for-profit (“NFP”) business corporation? At first glance, the Illinois NFP Articles of Incorporation look simplistic, but there are many things that should be considered prior to filing the NFP forms with the Secretary of State.

If you are contemplating this type of business entity and intend to file for an exempt status with the IRS, I recommend that you find a reliable accountant to navigate the IRS Code and a reputable attorney that you can consult with about the language required by the Illinois Secretary of State and the IRS. You will be working with Illinois statutes and the Internal Revenue Code and and in some instances you will have to cite the Liquor Control Act. If you are not a tax attorney or an accountant, this process can be somewhat intimidating.

It is not impossible to prepare the state and tax documents yourself, however, the IRS will be exacting in the language that is presented to them on behalf of your company’s request for exemption. The language set forth in the Articles of Incorporation for your NFP will need to mirror the requirements of the IRS as well as setting forth the description of the limitations imposed by law on the NFP.

If you are looking to educate yourself on the IRS exemption process I would recommend reading the following IRS publications: Publication 557 (06/2008), Tax-Exempt Status for Your Organization, and Chapter 25 - Exempt Organizations Determinations Manual: These two publications together with the 29 page Form 1023 that is required by the IRS to apply for tax exempt status, may just send you running to an accountant or tax attorney.

If you are not trying to obtain tax exempt status, the process becomes much less complicated.

Information required by the Secretary of State in the formation of Not-For-Profit Corporation is quite different from the information required when forming a for-profit corporation. Those differences are reflected in the corporate name, the general purpose clause, the state board of director requirements and the lack of shareholders and stock issuance. The information that is consistently required by the Secretary of State across all entity formations is the information about your registered agent. Who accepts your service of process and correspondence from the State of Illinois?

The Illinois Secretary of State requires the following items listed on the Not-For-Profit Articles of Incorporation and need to be included in your corporate filing:

1. Company Name. A NFP corporation must have one of the following endings: Corporation, Incorporated, Company or Limited and may be an abbreviation of any of those endings. If the corporate name implies the corporation may be organized for any other purpose other than the acceptable specific purpose as set out in the purpose clause, you will be required to include NFP to the corporate name.

2. Illinois Registered Agent. The address of the initial registered office and its initial registered agent. (This is where we hope you will use our services; we are the most reasonably priced and reliable agent representation for Illinois on the web!)

3. Number of Directors. List the number of directors constituting the first board of directors and their names and addresses. (Illinois requires a minimum of 3 directors for a NFP corporation).

4. Purpose. Each company must specify a purpose for organization. The State of Illinois requires the purpose clause to be specific, unlike the for profit corporation requirements that allows for a general purpose, the purpose of a NFP must be focused and to the point. Once you pinpoint your purpose a more descriptive narrative can be included. The following categories are authorized by the Illinois Secretary of State as an acceptable purpose(s) for the formation of NFP corporations:


1) Charitable;
2) Benevolent;
3) Eleemosynary;
4) Educational;
5) Civic;
6) Patriotic;
7) Political;
8) Religious;
9) Social;
10) Literary;
11) Athletic;
12) Scientific;
13) Research;
14) Agricultural;
15) Horticultural;
16) Soil improvement;
17) Crop improvement;
18) Livestock or poultry improvement;
19) Professional, commercial, industrial or trade association;
20) Promoting the development, establishment or expansion of industries;
21) Electrification on a cooperative basis;
22) Telephone service on a mutual or cooperative basis;
23) Ownership and operation of water supply facilities for drinking and general domestic use on a mutual or cooperative basis;
24) Ownership or administration of residential property on a cooperative basis;
25) Administration and operation of property owned on a condominium basis or by a homeowner association;
26) Administration and operation of an organization on a cooperative basis producing or providing goods, services or facilities primarily for the benefit of members who are consumers of such goods, services or facilities;
27) Operation of a community mental health board or center organized pursuant to the Community Mental Health Act for the purpose of providing direct patient services;
28) Provision of debt management services as authorized by the Debt Management Service Act;
29) Promotion, operation and administration of a ridesharing arrangement as defined in Section 1-176.1 of the Illinois Vehicle Code;
30) Administration and operation of an organization for the purpose of assisting low-income consumers in the acquisition of utility and telephone services;
31) Any purpose permitted to be exempt from taxation under Section 501(c) or 501(d) of the U.S. Internal Revenue Code, as now in or hereafter amended;
32) Any purpose that would qualify for tax-deductible gifts under the Section 170(c) of the U.S. Internal Revenue Code, as now or hereafter amended (Any such purpose is deemed to be charitable under subsection (a)(1) of this Section.); and
33) Furnishing natural gas on a cooperative basis.

(If a NFP is organized to function as a club, you must include a statement that the corporation will comply with the State and local laws and ordinances relating to alcoholic liquors).

5. Other. If you are applying for tax exempt status with the IRS you will be required to elaborate on your purpose clause and provide the limitations imposed by law on tax exempt organizations. This section must be written in compliance with the IRS Code and weighs heavily in the determination of your tax exempt status.

6. Incorporator. The name and address of each of your incorporators (Incorporator(s) refers to the person(s) filling out and filing the Articles of Incorporation forms for you).

Items that can be included in the Articles of Incorporation, but are not required by statute:

If a NFP corporation is a condominium association, as defined by the Condominium Property Act, a cooperative housing corporation as defined by the Internal Revenue Code, or a homeowner association which administers a common interest community as defined in the Illinois Code of Civil Procedures, the articles of incorporation may include the following provisions not inconsistent with law and with certain limitations as described more fully in the statutes:

• Managing and regulating company affairs, including distribution of assets upon final dissolution;

• Any provision under the Illinois General Not-For-Profit Corporation Act of 1986 is required or permitted to be set forth in the Articles of Incorporation or the corporation's by-laws. The Articles of Incorporation need not set forth any of the corporate Powers enumerated in the Illinois General Not-For-Profit Corporation Act of 1986.

• The duration of the corporation is perpetual unless otherwise specified in the Articles of Incorporation.

Access the Illinois Articles of Incorporation forms on our website: https://www.illinoisregisteredagent.com/forms

Illinois Registered Agent, Inc.