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.
- Liability protection: Both corporations and LLCs provide identical protection to their owners from liabilities of the business. (For an explanation, see: Why Incorporate Your Business?)
- Tax Treatment: Assuming that the business files an S-Corp election, both corporations and LLCs provide identical 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: In order 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.”
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.
- 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 along with 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, 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.
Please feel free to call or e-mail me with any questions, or to schedule a free consultation:
Kevin O'Flaherty | (630)324-6666 | email@example.com