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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.

This article aims to educate small business owners regarding the two types of corporate entities preferred for small businesses: the Limited Liability Company (LLC) and the Corporation.

‍Incorporating a business is essential 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 corporations and LLCs could 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 taxed as S-Corps. For simplicity’s sake, we will refer to them simply as Corporations and LLCs, understanding that both are S-Corps for the purposes of this discussion.

Similarities 

  • Liability protection: Both corporations and LLCs provide equal protection to their owners from business liabilities. (For an explanation, see: Why Incorporate Your Business?)
  • Tax Treatment: Assuming the business files an S-Corp election, corporations and LLCs provide equal tax treatment. (For an explanation, see: Everything You Need to Know About S-Corp Elections.)
  • Annual Reports: Both are required to file annual reports with the secretary of state.
  • Governing Document: To be effective, both corporations and LLCs are required to have a governing document (i.e., an agreement between the shareholders). For corporations, this document is called “bylaws;” for LLCs, it is called an “operating agreement.”

Differences 

‍For small businesses whose shareholders are actively engaged in managing the business, the differences between Corporations and LLCs mostly come down to costs.

  • Filing Fees: At the time of the writing of this article, the Illinois Secretary of State’s fee for processing Articles of Incorporation for a Corporation is $181.25. The fee for processing Articles of Organization for an LLC is $500.00. The annual fee to be paid by the secretary of state and your annual report will vary based on your company’s circumstances. The minimum (and typical) fee for a Corporation is $100.00; the fee for an LLC is $200.00.
  • Corporate Formalities: Corporations require more documentation than an LLC in order for their liability protection to be effective. In addition to the Bylaws, upon formation, a Corporation must document an initial meeting of its shareholders and as well as an initial meeting of its directors. This is not required of an LLC. On an annual basis, a Corporation must document annual meetings of its shareholders and directors, which is also not required of an LLC. A corporation is also required to issue stock to its shareholders, unlike an LLC.

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.

Posted 
November 16, 2020
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