How to start a business in Illinois

Looking to start a business in Illinois? It’s a smart choice for aspiring entrepreneurs and small business owners who want to take advantage of the many opportunities and benefits that the state offers. For starters, Illinois has a tax system that supports small businesses, plus a talented workforce, and a robust economy.

In fact, some of the best cities in the US to form a new business or startup in are located in Illinois, including Chicago, Springfield, Champaign, and Decatur. These cities have diverse and thriving industries that include finance, healthcare, manufacturing and agriculture, among many others. And Illinois makes it easy to access various business resources and incentives to help you expand your business and reach your objectives.

If your goal is to start a legitimate business in The Prairie State, you’ll need to know the legal requirements and responsibilities that apply to your new venture. The resources you need vary depending on the kind of business you want to run and where you want to operate. That’s why we’ve put together a detailed, step-by-step guide that will help you go through the process. Let’s dive in.

What are the steps to opening a business in the state of Illinois?

1. Develop your business idea

Coming up with your business idea is one of the most fun, yet challenging parts of determining how to start a business in Illinois. If you don’t have a clear business idea yet, you can get inspired by thinking about what you love, what you’re good at, and what you see a need for, and consider how you can make money and create value from that pool of ideas. You can also look at other successful businesses in Illinois and consider how you might enhance some aspect of the business model like the price point, target market, product offerings, etc.

Having a great idea isn’t always enough to ensure success. You also need to make sure that there are customers who want your product or service and will actually purchase from you. You can do some research to see if there are any other businesses in your niche and how they are performing. If you don’t find any competition, it could mean that you’re onto something great, or that there isn’t enough interest in your idea to make it profitable. 

To validate your business idea , you should:

• Be open to feedback from trusted people who know the market, know your strengths and weaknesses, or have some other unique perspective to offer. Test your assumptions and explore the risks to avoid costly mistakes.

• Learn about your industry, market, competition and trends to identify opportunities and threats that can help position your business accordingly.

• Understand your target audience and their needs, wants, and pain points to create products or services that they value and are willing to pay for.

• Be willing to alter your vision as needed to improve your business idea and the likelihood of success. 

2. Create your small business plan

When you start a new business in Illinois, you need a solid business plan to guide you. It can help you define your vision, strategies, and financial plans as well as help attract any necessary funding for your new business from investors or lenders.

Your business plan should cover everything that matters to your business, such as your products or services, target market, financial plans, company structure, management team and marketing strategies. The more specific your business plan is, the more ready you’ll be to overcome any obstacles as you operate and grow your business.

To write a good business plan, you’ll want to keep things clear and concise. Use powerful words and visuals to make your points, but be realistic about your goals and plans. Get feedback from others before you finish your plan, and don’t forget to make updates to it as time goes on.

Here's what you should include in your business plan:

3. Secure necessary funding

Wondering how to start a business in Illinois with the right amount of funding? One of the ways to fund your business is to get a loan from a third-party lender who specializes in helping small businesses get started. Heartland trusts Lendio to provide capital lending solutions for businesses of all sizes and stages. You can get business loans ranging from $5,000 to $5 million, depending on your needs and qualifications.

Another way to fund your business is through a traditional bank loan. And many aspiring business owners use crowdfunding, or personal investments to secure funding for their business needs. It might be difficult to secure enough funding through alternative methods, and some entrepreneurs aren't comfortable accepting investments from family or friends, either. Unless you have a sizable nest egg saved up, capital lending solutions may be your best bet.

In any case, you'll need to make sure you have the cash available to buy or lease commercial real estate, set up a storefront, if applicable, and purchase technology equipment and inventory to support your business activities. It’s important to consider your options carefully before making a decision.

4. Choose your business name

Choosing a business name is one of the first steps to starting a business in Illinois. It's like picking a name for your firstborn child: you want it to be unique, memorable, and reflect your business' personality. Once you have a name picked out, do a name search on the Illinois Secretary of State's website to see if it's already taken. If not, you can register your new business name online when you form your legal entity. Registering your business name will help you protect your rights to the name and prevent other businesses from using it.

If you aren't prepared to form your legal entity yet, you can complete and submit a Name Reservation form to hold your chosen name for up to 90 days. The cost to reserve a business name in the state of Illinois is $25 for all entity types. Remember, name reservation doesn't prevent other businesses from using the name. To do that, you'll need to legally register your business.

Pro tip! Reserve your website domain name

Once you've chosen a business name, it's time to make it official by purchasing a website domain name and creating social media accounts. This will help you build an online presence and reach your customers where they are. You can also use your business name as your domain name, which will make it easy for customers to find you online. For social media, create accounts on the platforms that your target audience uses the most, and you'll be on the right track toward building an online presence that will help you grow your business.

5. Identify your business structure and business entity type

The legal entity you choose for your Illinois business will affect how much personal risk you take on, how much paperwork and reporting you need to do with the Internal Revenue Service (IRS), and how you can get funding. There are five main types of legal entities: general partnership, sole proprietorship, limited liability company (LLC), corporation, and nonprofit. Each type has its own advantages and disadvantages, so you should choose the one that's right for your specific needs and circumstances. If you aren't sure which to form, take a look at the business structures below. It's always a good idea to consult with an attorney, accountant or both before making the final call.

General partnership

A general partnership is a business structure in which two or more people share the profits and losses generated by the business. Each of the business owners is personally liable for the debts and obligations of the business, as there is no limited liability protection (business insurance or liability insurance can help, but these policies must be purchased separately). There's no formal registration or paperwork required either, but most partnerships will create an operating agreement to outline each owner's roles and responsibilities and avoid any disputes.

A Limited Liability Partnership (LLP) is similar, but limited partners are typically only investors and don't have a vested interest in the day-to-day aspects of the business, whereas general partners run the show.

To file taxes, partners report their share of the partnership income (or loss) on their personal tax returns, as they aren't registered companies. Each owner will pay personal income tax just as if they were self-employed.

Sole proprietorship

A sole proprietorship is a type of business where one person (the sole proprietor) owns and runs everything. They make all the decisions and have full control over every part of the business. Sole proprietorships are easy and cheap to start and don’t require any formal registration or paperwork. But like partnerships, sole proprietorships lack limited liability protection, so the owner is responsible for covering debts and liabilities which could negatively affect their personal assets in the case of a lawsuit or creditor collection process.

Sole proprietors report their income and expenses on their annual tax returns for personal income taxes, as the IRS taxes all of their profit as personal income.

Limited liability company (LLC)

A limited liability company (LLC) is a type of business that protects its owners from being personally liable for the business’ debts or liabilities. LLCs can have one or more owners, and the owners can be individuals, corporations, other LLCs, or foreign entities. To start an LLC in Illinois, you need to file articles of organization with the Illinois Secretary of State.

One of the benefits of an LLC is that you can choose how you want to be taxed; your LLC can be taxed as a pass-through entity or as a corporation. If you choose to be taxed as a pass-through entity, the income and expenses of the LLC will be taxed on the owners’ individual tax returns. If you choose to be taxed as a corporation, the LLC will be taxed separately from its owners, and double taxation would apply.

An Illinois LLC owned by one person is required to file Form 1040 with the IRS, while multi-member LLCs need to file Form 1065.

Subchapter "S" corporation (S corp)

An S Corp is a type of corporation that has chosen to be taxed as a pass-through entity. This means that the income and losses of the S Corp are taxed on the shareholders’ individual tax returns. This way, S Corps can avoid the double taxation that usually applies to corporations.

To become an S corporation, a business must meet certain requirements, such as having no more than 100 shareholders, having only one class of stock, and having shareholders that are either individuals, estates, trusts or certain types of charitable organizations. If a corporation meets these requirements, it can file Form 2553 “Election by a Small Business Corporation” with the Internal Revenue Service to elect S Corp status.

Subchapter "C" corporation (C Corp)

A C Corp is a type of business that is separate from its owners or shareholders. This means that the corporation is its own legal entity and is not responsible for the debts or liabilities of its owners. Instead, C Corps protect their owners from being personally liable for the debts or liabilities of the corporation.

C Corps have the ability to raise funds more easily than other entity types, as they can have as many shareholders as they want, and the shareholders can be individuals, corporations or other entities. That said, they also face double taxation, which means that the C Corp pays corporate taxes on its income first, and then the shareholders pay personal income taxes on the dividends that they receive.

C Corps also need to file annual reports, elect a board of directors, and hold an annual meeting for their shareholders. Businesses forming an Illinois corporation have to file Form 1120 with the IRS.

Nonprofit organization

Nonprofit organizations are businesses that don’t have to pay federal income taxes on their income, as long as they use their income for charitable purposes and don’t engage in political activities. Nonprofits can receive donations from various sources, and these donations are usually tax-deductible for the donors. Nonprofits also have the same limited liability protection as other registered corporations.

To be eligible for tax-exempt status, a nonprofit must meet certain requirements, such as having a charitable purpose that benefits the public, not being organized for profit, using any profit that is earned to further its mission, and not benefiting any private shareholder or individual. To apply for tax-exempt status, a nonprofit must file Form 1023 with the IRS. Once a nonprofit has been granted tax-exempt status, it must file an annual Form 990.

6. Register your small business in Illinois

Starting a new small business in Illinois requires you to choose a registered agent, file articles of organization (sometimes called articles of incorporation) and pay the Illinois state filing fee. The easiest and fastest way to do this is online through the Illinois Secretary of State website. The filing fee to register an LLC or corporation online is $150, or $50 for nonprofit organizations.

What is a registered agent?

A registered agent is a person or business that is appointed by a business to receive important legal documents for the business. All businesses in Illinois must have a registered agent with a physical address in Illinois (P.O. boxes aren't permitted) and be open during normal business hours. The registered agent’s main responsibility is to receive legal documents, such as tax notices, subpoenas, and court orders. Businesses can be their own registered agents, or they can hire a third-party registered agent service for a fee.

What are articles of organization?

Articles of organization are legal documents that provide essential information about the business and the owner’s responsibilities. In Illinois, new businesses must file articles of organization with the Illinois Secretary of State to become official businesses recognized by the state.

Articles of organization must include certain specific information that will be reviewed by the Illinois Secretary of State for approval. This information includes:

Entrepreneurs learning how to start a business in Illinois can file their articles of organization through the Illinois Secretary of State website.

Step 7: Apply for an Employer Identification Number (EIN)

A Federal Employer Identification Number (EIN) is a nine-digit number that the IRS assigns to registered businesses and organizations for tax purposes. In Illinois, all businesses that have employees or file a federal tax return need to have an EIN.

Getting an EIN provides several benefits for your business. You can use it instead of your Social Security Number (SSN) to protect your privacy, use it to apply for loans or open a business bank account or credit card account and you can legally hire employees to help you run your business.

You can apply for an EIN online through the IRS website. Obtaining an EIN online is quick and easy, and you’ll receive your EIN right away once you submit your application. Once you have your EIN, you’ll need to use it on all of your business tax forms and other official documents.

8. Open your small business bank account

Opening a business bank account in Illinois can help you manage your business finances more effectively and professionally. By separating your personal and business finances, you can keep track of your income, expenses and taxes far more efficiently and avoid potential tax issues.

You can also use your business bank account to establish business credit (which is extremely useful when you need to apply for business loans) and access online banking services to ease day-to-day financial processes. To open a business bank account in Illinois, be sure to first compare different banks to find one that suits your needs. Look for low or no fees, useful features, and a place closeby to your business for easy access.

Step 9: Obtain your business licenses and permits

Illinois doesn't have a business license requirement at a state level, however, business registration is required. You must register your business with the Illinois Department of Revenue if you do any business within the state of Illinois. This can be done by filing Form REG-1 online. Your business is also required to obtain a Certificate of Registration (a seller's permit) if you wish to sell taxable goods, and you'll need a business license to obtain one.

You can obtain a business license from your local municipality or county clerk's office. The cost varies—Cook County, which encompasses Chicago and the surrounding suburbs, provides a two-year general business license for $40, as an example. Your city or local municipality may have bylaws and require other licenses or permits for your type of business and its activities, such as serving alcohol or selling specific products.

There may be other professional regulations that apply and that require you to obtain additional licenses or permits to operate your business. It's always recommended that you check with your local gov or municipality to confirm your permit and license requirements.

10. Understand your Illinois business taxes

Registered businesses in Illinois state are required to pay various taxes—both federal and state taxes, when applicable. Here's what you should keep in mind when understanding tax obligations for your Illinois business:

Sales and use tax

Businesses that sell products or certain specific services need to collect the Illinois sales tax at the time of purchase. The sales tax rate in Illinois is 6.25%, though local municipalities and counties can add to this tax up to a maximum combined rate of 11%. Use tax is also 6.25% and applies to businesses that purchase products that are sold in another state by a vendor who doesn't charge the Illinois state sales tax.

Franchise tax

Currently, Illinois charges a tax for the privilege of doing business anywhere in the state. This is called a franchise tax, and as the amount your business must pay can vary, you should check with the Illinois Department of Revenue to make sure you're paying the correct amount.

It's worth noting that Illinois' franchise tax was repealed in 2020, but businesses are still required to pay franchise taxes until the repeal goes into effect at the end of 2025.

Corporate income tax

Corporations that do business in Illinois must pay a state corporate income tax of 7% on their taxable income, as well as the 21% federal corporate tax rate. Registered corporations have to file their Illinois corporate income tax returns every year, whether they earned income or not, even if they don't owe any tax.

It's up to you to ensure that you are meeting all tax obligations for your business, which is why it's highly advisable to review the information provided by the Illinois Department of Revenue and consult a licensed tax professional.

Personal property replacement tax

Personal property replacement taxes (PPRT) are funds that the state of Illinois collects and gives to local governments to make up for the money that local governments lost when they could no longer tax personal property owned by corporations, partnerships, and other business entities. Corporations in Illinois pay a 2.5% replacement tax on their net Illinois income, while partnerships, trusts and S Corps pay 1.5%.

Frequently asked questions (FAQs)

Ready to work with a company that knows what it’s like to start a business?

Now that you’re here, give yourself a pat on the back — this is a lot of information and you made it all the way through. As you prepare to start a business in Illinois, be sure to keep this guide handy.

You’ll also want to check out the Start-Up Path for Entrepreneurs, a free, jam-packed resource featuring interactive worksheets and a three-year financial plan designed to maximize your profitability and keep your finances healthy.

That’s not all. The Entrepreneur’s Studio, our recently-launched podcast, highlights empowering stories and inspiring insight from entrepreneurs who have been where you are. Tune in anytime and get advice from business owners like Shake Shack founder Danny Meyer, married business partners Kaleo Kanahele and Matthew Maclay, Food Network-featured entrepreneur Kevin Lee and many others.

Hey, the best is yet to come! Whenever you’re ready to launch your business in Illinois, Heartland is here to assist you.

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Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us