Building a Solid Foundation: Forming an Illinois LLC and Drafting a Comprehensive Operating Agreement
Forming a business is one of the most significant decisions an entrepreneur will ever make. In Illinois, the limited liability company (LLC) has become the entity of choice for startups, real estate investors, family businesses, and professional practices alike. Its appeal lies in flexibility: owners can design a governance and tax structure that fits their unique needs, while shielding themselves from personal liability for the company’s debts.
But forming an LLC is not just a matter of filing a single form with the Secretary of State. The real stability of an LLC comes from careful planning at the outset — and from the adoption of a well-drafted operating agreement that defines how the business will function in practice.
This article explores the steps to properly form and organize an Illinois LLC, and then examines the central role of an operating agreement in guiding its day-to-day operations and long-term governance.
The Mechanics of Forming an Illinois LLC
Choosing Illinois as the State of Formation
An LLC is always governed by the law of its state of formation. Illinois law — specifically, the Illinois Limited Liability Company Act (LLCA) — offers a balanced framework for entrepreneurs. While some businesses incorporate in Delaware or Nevada to take advantage of those states’ case law or tax policies, most small and mid-sized Illinois businesses benefit from organizing locally. Doing so simplifies filings, avoids the need for foreign qualification, and reduces costs.
Selecting the Name
The name of an LLC must include the words “limited liability company” or an abbreviation such as “LLC.” It cannot contain misleading terms like “corporation” or “incorporated,” and it must be distinguishable from existing entities on file with the Illinois Secretary of State. Entrepreneurs often underestimate the importance of this step: the chosen name becomes the foundation of branding, licensing, and intellectual property protection. If the business intends to operate under a trade name, it may also file for an assumed name, which must be renewed every five years.
Organizers, Registered Agent, and Principal Office
An organizer — often an attorney, but not necessarily a member — prepares and files the Articles of Organization. Illinois requires each LLC to maintain both a registered office (a physical Illinois street address) and a registered agent who resides in Illinois or is an entity authorized to do business here. This ensures there is always a reliable point of contact for service of process or state correspondence.
Filing the Articles of Organization
The Articles of Organization (Form LLC-5.5) are the official birth certificate of the LLC. They must state:
The company’s name and principal place of business.
Its registered office and agent.
The purpose of the LLC (which can be broadly stated as “any lawful business”).
The management structure — member-managed or manager-managed.
The names of the organizers and, if applicable, the managers.
Optional provisions may also be included, but most details about governance are left to the operating agreement. The filing fee is $150, with an extra $100 for expedited processing. Once filed, the LLC legally exists.
Federal EIN and Post-Formation Steps
After formation, the LLC should apply for an Employer Identification Number (EIN) with the IRS, even if it has only one member. This allows the company to open bank accounts, hire employees, and file tax returns. The LLC should also:
Apply for business licenses and permits.
Record initial resolutions authorizing bank accounts, officers, or budgets.
Protect intellectual property through state and federal registrations.
Keep required records, including tax returns, financial statements, and member lists.
These steps transform the LLC from a legal shell into a functioning business.
The Central Role of the Operating Agreement
An Illinois LLC does not need a written operating agreement to legally exist. But relying solely on the LLCA’s default provisions is risky. Those defaults may not align with the owners’ intentions, and they provide little flexibility in addressing real-world disputes.
The operating agreement is the cornerstone document of the LLC. It combines elements of corporate bylaws, a shareholders’ agreement, and a partnership agreement, tailored to the unique flexibility of the LLC model. A thorough agreement not only governs daily management but also provides rules for extraordinary events: death, disability, withdrawal, deadlock, or sale of the businessOperating Agreement Checklist (….
Key Provisions of an Operating Agreement
Membership and Ownership Structure
The agreement should clearly define who the members are, their percentage interests, and whether there are multiple classes of ownership (voting, non-voting, preferred). This prevents later disputes over who owns what. In multi-member LLCs, it should also set procedures for admitting new members, whether through unanimous consent, majority vote, or manager approval.
Management: Member-Managed vs. Manager-Managed
By default, Illinois LLCs are member-managed, meaning each member has equal authority to act on behalf of the company. But many businesses (especially those with passive investors) prefer a manager-managed structure. In that case, managers function like a board of directors, while members retain only limited voting rights. The operating agreement should spell out the scope of managers’ powers, how they are elected or removed, and whether they are compensated.
Voting Rights and Decision-Making
The LLCA requires unanimous consent for certain critical actions, such as amending the operating agreement, admitting a new member, or dissolving the company. But other matters may be decided by majority vote. The agreement can modify these thresholds — for example, requiring a supermajority for major decisions like selling all company assets — to balance flexibility with protection of minority owners.
Capital Contributions and Finance
The operating agreement should detail the initial capital contributions of each member, whether in cash, property, or services, and their agreed values. It should also address whether additional contributions may be required (capital calls), what happens if a member defaults, and whether members earn interest on contributions. Many agreements establish “capital accounts” to track each member’s economic stake for tax purposes.
Allocations and Distributions
Profits and losses can be allocated in proportion to ownership interests, equally, or under a “waterfall” structure with preferred returns for certain members. Distributions of cash or property can follow the same model. Because LLCs are pass-through entities by default, agreements often require “tax distributions” to cover members’ income tax liabilities resulting from their share of company profits.
Transfers of Interests and Buy-Sell Rights
To prevent unwanted outsiders from becoming members, agreements typically restrict transfers of membership interests. Common provisions include:
Right of first refusal: Other members have the chance to buy before an interest is sold externally.
Drag-along rights: Allow majority owners to force minority owners to participate in a sale.
Tag-along rights: Give minority owners the right to join in a sale initiated by the majority.
Buy-sell agreements: Establish terms for buying out a member in cases of death, disability, divorce, or bankruptcy.
Fiduciary Duties and Indemnification
Illinois law imposes duties of loyalty and care on members (in member-managed LLCs) and managers (in manager-managed LLCs). While these duties cannot be eliminated entirely, the operating agreement may tailor them, specify safe-harbor conduct, or establish procedures for approving conflicted transactions. Agreements may also provide for indemnification of members and managers against liabilities incurred in good faith service to the company.
Dissolution and Winding Up
Finally, the operating agreement should specify what events trigger dissolution — such as unanimous vote, expiration of a term, or the sale of substantially all assets — and how the company will wind up. Without these provisions, disputes over winding down can become expensive and time-consuming.
Why Careful Drafting Matters
Entrepreneurs often underestimate the importance of an operating agreement until conflict arises. A 50/50 LLC without deadlock-breaking provisions may freeze if the members disagree. A company without buy-sell rights may find itself forced into business with a deceased member’s heirs. And a failure to document capital contributions can spark litigation over ownership percentages.
By addressing these issues in advance, members not only protect themselves but also signal professionalism to investors, lenders, and partners.