The purpose of this article is to educate small business owners regarding the two types of corporate entities that are particularly preferable for small businesses: the Limited Liability Company (LLC) and the Corporation.
Incorporating a business is important for two primary reasons: (1) to protect personal assets from business creditors; and (2) to obtain favorable tax treatment for all business income. For more on this, please read our previous article: Why Incorporate Your Business?
In Everything You Need to Know About S-Corp Elections, we explained that both corporations and LLCs can be taxed as S-Corps by filing an S-Corp election with the IRS. We also explained the benefits of filing an S-Corp election.
Since S-Corp elections are typically a no-brainer for small business owners, rather than comparing Corporations in general with LLCs, this article will discuss Corporations that are taxed as S-Corps with LLCs that are taxes a S-Corps. For simplicity’s sake, we will refer to them simply as Corporations and LLCs, with the understanding that both are S-Corps for the purposes of this discussion.
For small businesses whose shareholders are actively engaged in the management of the business, the differences between Corporations and LLCs mostly come down to costs.
The Bottom Line
Your choice of legal form for your company will depend upon your goals and your individual circumstances. However, the corporation tends to be the preferable corporate form in Illinois, simply because of the cost savings on filing fees. Yes, you will have to jump through a few extra hoops, but these additional corporate formalities will typically be handled by your attorney and the attorney fees for this work should be minimal. At least in our practice, even when you account for additional attorney fees for a corporation’s corporate formalities, the corporation tends to be the more cost-effective option for small business owners.