These letters describe when and why the sales and use tax obligations arise, and offer an opportunity for businesses to come forward and voluntarily pay these taxes. Both Departments refer to these as a “Voluntary Disclosure Program”. In return for participating in the programs, a business’s liability is limited to the last four years and late filing and late payment penalties are waived. However, the Departments may still audit participants for the periods included in the program.

If the business chooses not to participate, the business is placed in an “audit pool” and may be selected for an audit. In such case, the audit period will cover the previous six years and penalties will become due.

This plan, obviously a desperate attempt to collect revenue that both the city and state are needing, may affect many businesses, especially retailers, manufacturers, and contractors.

The Chicago Department of Revenue is focusing on the collection of the city use tax. The Chicago use tax is imposed upon the privilege of using tangible personal property purchased from a retailer outside of the City of Chicago. The Illinois Department of Revenue stretches its focus to the Illinois use tax and Illinois sales tax. The Illinois use tax is imposed upon the privilege of using general merchandise purchased anywhere at retail from a retailer. Generally, if a business purchased merchandise where the seller did not charge a sales tax, it is likely that the use tax is owed. The Illinois sales tax is owed by businesses who sell general merchandise.

What to do? If you receive one of these notices, it is best to determine whether you 1) are subject to the Illinois and Chicago sales/use tax; 2) exempt from payment of these taxes; or 3) brave enough to take your chances in the audit pool.

The most common way people hold property is in their own names, either individually, or with others, such as a spouse. However, there are other ways to hold legal title to real estate, one of which is the LLC, or limited liability company, and its newest
variation, the series LLC. The LLC is used to hold property for a variety of reasons. First, it provides some anonymity because the deed to the property is not written in the individual buyer’s name, but rather the name of the LLC. That way, it is more difficult to discern who the individual owner of the property is. Second, and more importantly, the LLC is used to protect a person’s assets. The law provides that the owners of the LLC, known as “members”, are liable for the debts and actions of the company only up to what they have invested in it. This means that if a creditor obtains a judgment against a member, then the creditor is limited to collecting only up to the value of that member’s investment in the LLC. For example, John owns two cars, a boat, his principal home, and two other investment properties that he rents all in his individual name. A tenant of one of John’s investment property sues him and wins. Because John owns all of the property in his individual name, the tenant can make a claim against all of John’s property. However, if John placed the rental property in an LLC, the tenant would only be able to recover up to the value of the LLC, which would be the value of that property. By placing the rental property in an LLC, John is able to protect his other assets. Finally, the LLC has no negative tax effects because it is taxed as a “pass through” entity. This means that any income of the LLC passes through to the members and is filed on their individual tax returns.

In August of 2005, the Illinois legislature passed an Act that created the “series LLC”. The series LLC is like an LLC, but it can have a series of entities within it, not just one. Therefore, if you own multiple investment properties, you can place each property in a separate series instead of creating multiple LLCs. If done correctly, each series is treated as a separate entity and therefore debts and liabilities are enforceable only against the series to which they pertain. Also, each series can have different members. Therefore, one series may be owned by two people, another may be owned by those same two people plus two or three different people, or any number of members who may or may not have any membership interests in the other series. Also, each series may be treated as a separate LLC for income tax purposes. But why not just create an LLC for each property instead of creating a series LLC? The main reason is cost. It is much cheaper to create one series LLC instead of multiple LLCs. Another reason is manageability. It is easier to keep track of the series LLC when it comes to finances, accounting, membership, etc. However, it is important to remember that in order to be treated as a series LLC, each series must maintain separate books and records.

It is important to protect your wealth so that you do not risk losing it in your lifetime. Many people rely on their real estate properties as their source of retirement income. Holding multiple properties in your individual name exposes those properties to claims of creditors or judgments. This is why it is very important to avoid those risks by placing the real estate in an entity such as an LLC, or series LLC.