What to Know About Running a Business in Illinois

The state of business in Illinois

As of 2019, the U.S. Small Business Administration’s Office of Advocacy reported that there were more than 1.2 million small businesses operating in the state of Illinois, employing 2.5 million people, which accounted for 45.1% of the state’s workforce and nearly 20% of the entire population. At that time, small businesses accounted for 99.6% of the state’s private enterprise, making them a vital part of Illinois’s economy. 

The pandemic was hard on small businesses, and updated figures have not been released, so these numbers may well be lower today. Still, the state clearly has a thriving culture of entrepreneurship and is welcoming to small businesses. That said, based on total economic activity, economic health and innovation potential, the state’s economy lags compared to the rest of the Midwest. 

Illinois’ government has had a history of fiscal trouble, which has not gone unnoticed by the business community. Currently, the state has a BBB+ bond rating, and Gov. J.B. Pritzker claims his budget will lead to a surplus of $1.7 billion this year, but as recently as 2017, the state’s bonds were graded at the lowest investment-grade rating available, and the state budget has not been balanced since 2001. 

Some other challenges face the state as well. Illinois has had a lower GDP growth rate than the nation as a whole for the past few years, and its population has declined by nearly 6% over the past decade. However, there are bright spots too. The state is in the upper quartile in terms of personal savings rates, incomes are higher than average and access to capital remains strong.  Despite the very real challenges in Illinois, small business owners continue to experience growth and remain optimistic for the future.

Fiscal turmoil in the state capital

Nationwide, Illinois is well known as a state with financial troubles. Though current projections are somewhat rosier, in large part because of federal infusions of cash in recent years, the state has faced multibillion-dollar deficits and been forced to shed much-needed services and programs. In the mid-2010s, lawmakers were unable to adequately address the issue for years at a time; as a result, the state’s credit rating plummeted. Though the rating has since recovered, some wonder whether the underlying issues have been sufficiently addressed.

“The state of Illinois faces a gargantuan pension liability,” said Jim Collins, co-founder of Datamation. “This lack of fiscal management breeds concern among small business, and it is likely that the state will need to cut key functions and services.” Though the state has reduced its unfunded pension liability by $1.4 billion in recent years, the overall figure remains north of $130 billion.

Fortunately, things might be looking up in the state’s capital. Governor Pritzker has broken through the worst of the gridlock and made progress on fiscal issues. The state’s recent legalization of gambling and cannabis has helped shore up the hole in the budget by contributing revenue, creating jobs and attracting people. [See the cannabis industry’s growth potential.]

“We’re still in a good place economically,” said Spencer Hadelman, CEO of Advantage Marketing. “As gambling and cannabis evolve, there will be even more opportunities, just as we’ve seen in states like California and Colorado. The bringing in of new jobs will only help the state’s economy.”

High business taxes

Illinois is known for high business taxes, with a top corporate income tax rate of 9.5%. Only Minnesota, Iowa, Pennsylvania and New Jersey have higher corporate income taxes. In addition, its state sales tax stands at 6.25%, which is higher than average. With the addition of local sales taxes in some areas, especially near Chicago, the overall sales tax burden in the state ranks in the top third. In Illinois, Tax Freedom Day comes on April 24, meaning it takes Illinois taxpayers longer than 44 other states to earn enough money to pay off their full tax bill.

“The taxation situation in our state is extremely disappointing,” said Justin Carrol, president of Perfect Home Services. “Statistics show that people are fleeing from Illinois, and I believe taxation is a large contributor to that. We’re one of the highest-taxed states in the country, and our state is still broke. I pray that someone will come in and get this state turned around soon.” 

Still, Illinois’ individual tax rate is significantly lower than those of many other states, standing at a flat rate of 4.95%. For pass-through entities, such as limited liability companies (LLCs), taxes are calculated as personal income rather than by the state’s corporate tax rate.

Proximity to large markets

Running a business is always much easier where there’s a lot of people around, especially when those people live near one another. Being near a major city offers a boost to business owners because cities attract a great deal of economic activity, meaning money and people flow in and out regularly. Illinois, of course, is home to Chicago, a city of 2.7 million people and the third-largest metropolitan area in the U.S. The surrounding suburbs bring the population of the Chicagoland area up to about 9.5 million people, providing easy access to business owners.

“I have operated businesses in Illinois, Indiana and Florida,” said Bill Davy, owner of a Fred Astaire Dance Studio location in a suburb of Chicago. “Illinois, specifically Chicagoland, has the largest and most diverse population of the three.”

As of January 2022, the minimum wage in Illinois is $12 per hour, and it is scheduled to reach $15 per hour by 2025. Chicago alone has already increased its minimum wage to $15 an hour for large businesses and $14 an hour for those with fewer than 20 employees, and Cook County will be at $13.35 per hour as of July 2022. These are all higher than the federal minimum wage of $7.25, meaning that while it is more expensive to hire in the state, consumers also have more money to spend. 

Large markets like Chicago offer significant advantages to businesses, both in terms of the customer base and a labor pool from which to hire top talent. Illinois is unique not only because it is home to a major metropolitan area, but it is also geographically close to virtually every major urban center across the country. Whether you need to travel frequently, bring clients in for a visit or order supplies, Illinois is centrally situated and well connected to the nation’s infrastructure. Entrepreneurs frequently cited that location is a major benefit of doing business in Illinois.

“If you’re going to do business anywhere in the Midwest, Illinois is a great bet because it’s a national transportation hub for flying, rail [and] even shipping,” said Mazyar Hedayat, owner of the law firm M. Hedayat & Associates.

“Being centrally located by a national transportation hub makes Illinois an ideal place for quickly shipping products anywhere in the 48 states,” added Jacob Aune, artisan and co-founder of Altare Design. “I can obtain just about any supplies needed to manufacture wood products locally, then tap into markets across the country.”

Skilled labor in a relatively flexible market

Illinois enjoys the benefits of a diverse and skilled labor market, largely due to Chicago’s dense population, high-caliber universities and other opportunities for workers to develop their skills. According to the Bureau of Labor Statistics, there are more than 6.4 million people in the state’s workforce, giving employers a large pool to choose from.

“We have access to hiring tremendously skilled talent in key areas,” said Ross Kimbarovsky, founder of crowdsourced design company Crowdspring. “These people have cut their teeth at significant and successful companies in the area. That’s one huge advantage.”

The state’s unemployment rate currently stands at 4.6%, which is relatively low but remains a point higher than the national average. While the low unemployment rate means it is still an employee’s labor market, Illinois businesses don’t face the same stringent competition as those in states where the unemployment rate is often a full point lower. At the same time, Illinois’ per capita disposable personal income is roughly 5% higher than the national average, meaning employees will expect more attractive compensation plans than those in states where personal income is lower. 

Industries to watch and to avoid

Data from Growjo shows companies in technology generally, and financial technology, advanced manufacturing and advanced manufacturing specifically, are growing quickly in Chicago and its suburbs. Though these industries can have substantial barriers to entry, they also create collateral opportunities, like staffing and food service, near offices and production facilities. Shipping and transportation also remain key industries in Illinois too, with the state centrally located between U.S. manufacturing and consumption hubs, and businesses are increasingly looking to outsource their shipping. 

Several industries, including hospitality and tourism, education, health, and simple manufacturing, have shrunk during the pandemic, according to Illinois Policy and the Illinois Department of Employment Security, and it’s unclear when they’ll find their footing again. You may want to avoid these sectors if you’re new to operating in Illinois.

Frequently asked questions

Starting a business anywhere can be a difficult process, and navigating regulations and obtaining the right licenses can seem confusing and overwhelming. If you’re looking to start a business in Illinois, check out these frequently asked questions, and take a look at some other resources to help you launch your company.

• Stumped on what type of business you want to run? Check out our list of great small business ideas.
• Need help writing a business plan? These business plan templates should help you get started.
• Not sure which is the best legal structure for your business? We’ve broken down the various types, including sole proprietorships, partnerships, LLCs and various types of corporations. 
• Looking for funding for your startup? These reviews of the best business loans can help.
• Make sure you’re managing your money in the most effective way with highly rated accounting software.

How do you start your own business in Illinois?

To start a business in Illinois, you must first select which type of business entity under which you would like to incorporate. These include sole proprietorships, general partnerships, limited partnerships and C corporations. Once you determine your entity type, you must register your business with the Illinois Department of Revenue as well as the Internal Revenue Service (IRS).

In addition to registering your new entity, if you employ any workers for 20 calendar weeks or more, you must contribute unemployment insurance to the Illinois Department of Employment Security. You are also required to obtain workers’ compensation insurance to cover accidental injuries, deaths or occupational diseases.

Which type of Illinois business entity should you choose?

The type of entity you should select when incorporating a business in Illinois depends on your industry, business size and type of operation. Sole proprietorships include LLCs, which are considered pass-through entities under tax law and hold the owner personally liable for the company and all its debts. Corporations, such as C corporations and S corporations, are separate legal entities that shield owners from legal liability for the business. In corporations, shareholders own stock in the company, elect a board of directors and include officers such as presidents to run the company.

How many business licenses do you need in Illinois?

The number and type of licenses and permits you need depend on your business’s operations. In Illinois, there is no state requirement for a basic business license, but most businesses must register with the Department of Revenue. In addition, your business might be subject to licensing rules specific to the state and municipality in which it is located. To learn more about which business licenses and permits you require, visit the Illinois Department of Commerce & Economic Opportunity’s website.

How much does a business license cost in Illinois?

The cost of a business license or permit varies by the type of licensure your business requires and its location. Typically, business licenses in Illinois cost between $20 and $100.

Does your business name need to be reserved?

Yes. To reserve your business’s name in Illinois, you must check to see if your desired name is available with the Illinois Secretary of State. If the name you’d like is available, you can submit an application. Typically, these applications will be processed within one to three business weeks. If accepted, the business name will be reserved for 90 days. Once that period is up, the business name must be renewed.

What if another business has the same name?

If another business already has your desired name, it is unavailable for reservation. You will have to incorporate your business under a different name. However, if you’d like to do business under a variation of your desired name, you can file for a “doing business as” (DBA) or “fictitious name” registration. A DBA allows you to operate under a name that is different from the name you incorporated under.

What is corporate dissolution in Illinois?

Corporate dissolution in Illinois is the process by which a corporation officially ends its existence within the state. If you are registered to do business in Illinois, dissolving your corporation ends its liabilities to creditors. Under the state’s Business Corporation Act, corporate dissolution requires the unanimous and written consent of all shareholders who are entitled to a vote under the company’s organization. It requires the drafting and filing of articles of dissolution. Following the vote to dissolve the corporation, you will still have to collect all of the business’s assets, dispose of corporate properties that will not be distributed among shareholders, discharge corporate liabilities and distribute any remaining properties accordingly.

How often do you have to file sales tax returns in Illinois?

In Illinois, sales tax returns are due on the 20th of the month following each reporting period. Sales tax returns are filed using the state’s Form ST-1.

When is a company required to file as a foreign corporation in Illinois?

If your company is registered in another state, you must register it as a foreign entity in Illinois before you can begin conducting any business there. To begin the process, you must file an Application for Authority with the Illinois Secretary of State.

Resources for small businesses in Illinois

If you’re a small business owner in Illinois or a prospective one looking for resources to help you move forward, here are a few organizations you might want to learn more about.

Illinois Small Business Development Centers (SBDC)

Illinois is home to dozens of SBDCs. Each is dedicated to supporting the development and retention of small businesses, and helps entrepreneurs with tasks like crafting business plans and navigating the state’s tax code.

Illinois SCORE

SCORE provides volunteer business professionals and expert “mentors” to help counsel and guide entrepreneurs looking to start or expand their businesses. The group’s services are free and volunteer-driven.

Illinois Department of Commerce and Economic Opportunity (DCEO)

The primary focus of the Illinois DCEO is to promote the retention and creation of jobs and to perpetuate economic growth. To this end, the department has access to resources and information that can benefit entrepreneurs.

Illinois University Incubator Network

This website watches and reports on incubators and accelerators throughout the state. It contains a treasure trove of information for startups looking to apply to such programs, which can give you exposure, capital and the knowledge to take your entrepreneurial endeavor to a higher level.

Gies College of Business – University of Illinois

Hosting one of the state’s SBDCs as well as the iVenture Accelerator, the Gies College of Business at the University of Illinois is cited by several small business owners as a prime resource.

The Land of Lincoln can be the land of opportunity

If you can manage the state’s business challenges and take advantage of its opportunities, Illinois’ current healthy economic environment, skilled workforce, and large customer base can make it a great location to start and run a company. However, the state has faced large budget deficits and poor credit ratings in recent years, so the strong business climate could go south again. Stay on top of local economic forecasts, even after your company is up and running, so you can make decisions accordingly.

Ross Mudrick contributed to the writing and research in this article. Source interviews were conducted for a previous version of this article.