The purpose of this article is to explain how to choose a business structure in Illinois. We address the following:
- What are the benefits of incorporating?
- What are the differences between S-Corps, C-Corps, LLCs, Sole Proprietorship, Partnerships?
What are the benefits of incorporating?
There are two primary benefits to incorporating your business:
- Protection from Personal Liability: Shareholders of a corporation and members of an LLC are generally not personally liable for the debts of the corporation. This means that when someone sues a corporation or LLC, they can only recover assets that are owned by the corporation or LLC. They cannot recover assets personally owned by the shareholders and members.
- Tax Benefits: Incorporating can provide benefits both from an income tax perspective and a self-employment tax perspective.
What are the differences between S-Corps, C-Corps, LLCs, Sole Proprietorship, Partnerships Illinois?
- Sole proprietorship: A sole proprietorship is when a single person opens a business without incorporating. The sole proprietor is personally liable for business debts and will not receive any beneficial tax treatment.
- Partnerships: In a partnership, two or more people are doing business together without incorporating. They may or may not have a partnership agreement which governs their relationship to one another, but they have not incorporated. Like sole proprietorship, partnerships do not benefit from liability protection or favorable tax treatment.
- C-Corporations — C-Corporations are best for large companies. While they offer liability protection, the tax treatment of C-Corporations is not as favorable as that of S-Corporations and LLCs. C-Corporation profits are taxed at the corporate level, and then taxed a second time on the personal level when distributions are made to shareholders. C-Corporations make sense when the business is not eligible to be an S-Corporation because of the number or type of shareholders.
- S Corporations — S-Corporations provide the liability benefits of C-Corporations. However, unlike C-Corporations, S-Corporations are not taxed twice for income tax purposes. Taxes pass through directly to the individual shareholders’ tax returns. S-Corporations also have beneficial tax treatment for self-employment tax. Unlike C-Corporations, S-Corporations have limitations on who can be a shareholder and the number of shareholders. In order for shareholders of C-Corporations and S-Corporations to continue to receive the liability and tax benefits of the corporate form, both types of corporations must maintain certain corporate formalities such as holding regular meetings of shareholders and directors.
- Limited Liability Companies — Commonly referred to as LLCs, limited liability companies are great options for smaller businesses. LLCs provide the liability and income tax benefits of an S-Corporation. LLCs can elect with the IRS to be taxed as an S-Corp, which allows the members of the LLC to receive the favorable S-Corp self-employment tax benefits discussed above. Members of LLCs are not required to follow as many corporate formalities as shareholders in S-Corps. The decision making process between members is less formal. This makes them ideal for close partnerships in which all members are actively involved. Passive investors may prefer the more formal decision making process of S-Corps in order to ensure their interests are protected.
Illinois business owners also have the option of selecting less common business structures, including nonprofits, B Corporations, and Limited Liability Partnerships, which are beyond the scope of this article.