One of the first decisions in starting a business is how to structure it. The choice affects your personal liability, how the business is taxed, how much paperwork you will have each year, and how easily you can bring in partners or investors later. There is no single right answer. The best structure depends on what the business does, who owns it, and where you want it to go.
Here is an overview of the most common options for Illinois businesses.
At a glance
| Structure | Liability Protection | Taxation (General) | Often a Fit For |
|---|---|---|---|
| Sole Proprietorship | None. The owner is personally responsible for business debts. | Reported on the owner's personal return. | Very low-risk side work being tested. |
| LLC | Generally shields owners' personal assets. | Flexible. Taxed as a sole proprietorship or partnership by default, or may elect corporate treatment. | Most small businesses, real estate holdings, and professional services. |
| S Corporation Election | Same as the underlying LLC or corporation. | Pass-through taxation with potential payroll tax planning opportunities. | Profitable businesses with owners on payroll. |
| C Corporation | Generally shields shareholders' personal assets. | Taxed at the entity level; dividends taxed again to shareholders. | Businesses seeking outside investors or planning to issue stock. |
Sole proprietorship
If you start doing business on your own without forming an entity, you are a sole proprietor by default. There is nothing to file with the Secretary of State, although you may need to register an assumed name if you operate under a name other than your own.
The simplicity comes at a cost: there is no separation between you and the business. If the business is sued or cannot pay its debts, your personal savings, home, and other assets can be at risk. For anything beyond very low-risk work, most owners move to an entity that limits personal liability.
Limited liability company (LLC)
The LLC is the most common choice for Illinois small businesses. An LLC is formed by filing Articles of Organization with the Illinois Secretary of State, and it must file an annual report each year to stay in good standing.
- Liability protection: an LLC generally protects the owners' personal assets from the business's debts and obligations, as long as the company is properly maintained as a separate entity.
- Tax flexibility: by default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC is taxed like a partnership. An LLC can also elect to be taxed as an S corporation or a C corporation.
- Operating agreement: Illinois does not require you to file one, but a written operating agreement sets out ownership, management, and what happens when an owner leaves, dies, or wants out. It also helps show the business is separate from you personally.
S corporation election
An S corporation is not a separate type of entity under Illinois law. It is a federal tax election that an LLC or corporation can make with the IRS. Profits pass through to the owners' personal returns, and owners who work in the business are paid a reasonable salary through payroll.
For a profitable business, the S corporation election can create payroll tax planning opportunities. It also adds payroll, bookkeeping, and filing requirements, and there are limits on who can own shares. Whether the election makes sense is a question to work through with your accountant.
C corporation
A C corporation is formed by filing Articles of Incorporation with the Illinois Secretary of State. It has shareholders, a board of directors, and officers, and it follows more formal governance rules, such as bylaws, board resolutions, and annual meetings.
A C corporation pays tax on its own profits, and shareholders pay tax again on dividends. That double taxation makes it less common for small, owner-operated businesses. It is often the right fit for companies that plan to raise money from outside investors or issue different classes of stock.
Questions to ask before you decide
- How much liability exposure does the business carry, from customers, employees, contracts, or property?
- Will there be one owner or several, and how will decisions be made?
- Do you expect to bring in investors or sell the business someday?
- How profitable do you expect the business to be in its first few years?
- How much administrative work are you willing to take on each year?
Your structure can change as the business grows. Many owners start as an LLC and later make an S corporation election or convert to a corporation when the business calls for it.
Getting it right from the start
Filing the formation paperwork is the easy part. The decisions behind it, and the governing documents that go with it, are what protect you later. McGregor Dunn Law LLC helps Illinois business owners choose a structure, form the entity, and prepare operating agreements, bylaws, and buy-sell agreements. Learn more about our business formation services.
This post is provided for general informational purposes only and is not legal or tax advice. Tax consequences vary, and you should consult your accountant or tax professional about your situation. Reading this article does not create an attorney-client relationship.
Questions about your situation? Call (630) 439-8989 or send us a message.