One area of benefits from using non-Illinois entities is in the area of asset protection. The laws of the different states vary greatly regarding asset protection. For example, 2 forms of asset protection are tenancy by the entirety ownership of the equity interests in an entity and limited “charging order in lieu of foreclosure” creditor rights to lien on the equity interests in an entity. While Illinois does not allow tenancy by the entirety ownership of the equity interests in an entity, other states, such as Delaware, do. In addition, some states, such as Delaware and Nevada, provide expansive asset protection based on limited “charging order in lieu of foreclosure” creditor rights to lien on the equity interests in an entity, while Illinois does not. If you want to minimize the risk of liabilities, creditors, and litigation adversely affecting you and your business, you may want to form your business entity in a state other than Illinois.

A second area of benefits from using non-Illinois entities is in the area of state income taxation. Income tax rates and systems vary significantly from state to state. Some states, such as Nevada and Texas, do not assess any state income taxes. On the other hand, in Illinois, in recent years, income tax rates have been increasing. Currently, corporations that pay corporate income taxes in Illinois, so-called “C corporations”, are in effect subject to a 9.5% tax rate on income. If your business is a “C corporation” and you want to minimize your state income tax liability, you may want to form your business entity in a state other than Illinois.

For new businesses, it is easy to simply file the entity’s formation documents in a state other than Illinois. For existing businesses, it is usually possible to merge your “Illinois” entity into a new “non-Illinois” entity on a tax-free basis and then take advantage of the above-described benefits of having a “non-Illinois” entity.

Using a “non-Illinois” entity will not be appropriate for every Illinois business. However, the potential benefits described above are significant enough that the issue warrants a discussion and analysis with your advisers.

If you wish to discuss any of the above, find Pen Pal Gary’s contact info here.

Disclaimer: please note that nothing in this article is intended to be, or should be relied on as, legal advice of any kind. Neither LHBR Consulting, LLC nor Gary Stern provides legal services of any kind.

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