The power of the Illinois LLC

In Illinois, both potential and existing business owners have a multitude of business formation options. Some of the most popular entities include: S-Corporations, limited liability partnerships, and limited liability companies. However, many business owners choose the limited liability company for asset protection because of its strong ability to prevent the "piercing of the corporate veil."

For example, my law firm recently represented an individual who had transferred close to one million dollars to an Illinois limited liability company under the auspices that the funds would be used to acquire various goods and services. The matter entered litigation due to the funds being misappropriated to other limited liability companies owned by the same individuals - a Ponzi scheme of sorts. Litigation, which should have been a straight shot, turned into a maze of defenses ranging from "piercing the corporate veil" to the "business judgment rule." Needless to say, it took over a year for our client to obtain a judgment in the matter, and one of the defendant owners was protected by the limited liability company, personally.

While our clients ultimately won their case, the lesson that can be learned is just how protective the Illinois limited liability company really is - especially for silent partners (technically called 'members') who had no involvement with a tortious action of other members.

The limited liability of the company provides its members with significant shielding from both creditors, lawsuits, and day to day operational issues. Even an allegation of breach of fiduciary duties or fraud can prove challenging to get to the individual members, if those members acted within the governing operating agreement. See Sklodowski v Countrywide, 358 Ill. App. 3d (1st Dist. 2005). Additionally, an Illinois LLC operating agreement can be written as a powerful contract created to govern the company that, when acting within the realm of that agreement, can severely limit any of its members' liability.

The Illinois LLC can also provide its members with preferential tax treatment. A multi-member LLC provides the tax advantages of a partnership with the limited liability of a corporation. Members can elect to be treated as a partnership (the default setting), or a corporation. A single member LLC can elect to be disregarded and receive pass-through taxation consistent with a Schedule C on the owner's 1040 tax return. A disregarded entity is both flexible and a relatively informal system compared to the formalities of an S or C corp.

While limited liability companies in Illinois cost more to file than corporations, they have reduced maintenance work - usually at the cost to the corporation.

Corporations in Illinois have far more formality requirements than LLCs, such as for reporting, meetings, and directors. LLCs generally involve less of these stringent requirements.

In sum, choosing a limited liability company as a business owner involves asset protection, tax, liability, and corporate maintenance benefits.

• Aaron E. Rifkind Esq. is comanaging partner of Rifkind Patrick LLC. You can reach him at legal@rifkindpatrick.com