LLC vs S-Corp | What Entrepreneurs Need to Know in Illinois

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LLC vs S-Corp in Illinois

When starting a small business in the Illinois, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in Illinois. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in Illinois. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in Illinois

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in Illinois?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in Illinois?

Unlike a limited liability company (LLC) or other business structures, Illinois S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in Illinois

Creating a business in Illinois requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming Illinois Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in Illinois does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Illinois.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Illinois

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in Illinois is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Illinois. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in Illinois are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Illinois are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Illinois to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in Illinois with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

Illinois State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Illinois, it costs $75, which can be paid to the IN Secretary of State. Of course, before forming the whole LLC, you must pay the initial fee of $15 to the Illinois Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Illinois have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

Illinois LLC: An LLC can have any number of owners, called members, from starting Illinois Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

Illinois S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

Illinois LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in Illinois.

Illinois S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

Illinois LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

Illinois S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

Illinois LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the Illinois Operating Agreement.

Illinois S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

Illinois LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in Illinois: LLC or S-Corp?

Filing an LLC or S-Corporation in Illinois requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Registered Agent. To establish an LLC in Illinois, you must submit the Articles of Organization to the Illinois Department of Revenue. Your Articles of Organization must include information about your Illinois LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the Illinois S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in Illinois: LLC or S-Corp?

Taxes for LLCs and S-Corporations in Illinois depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the Illinois LLC Cost for detailed information.

Illinois S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate Illinois LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in Illinois?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in Illinois. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734​ in Illinois.

FAQs

What is the difference between an LLC and an S-corp in Illinois?
An LLC is a type of business structure that provides the features of both a corporation and a partnership, while an S-corp is a specific type of corporation that avoids double taxation by giving the shareholders pass-through taxation.
What are the advantages of forming an LLC in Illinois?
Advantages of forming an LLC include pass-through taxation, limited liability protection for members, and flexibility in terms of management structure and profit distribution.
What are the advantages of forming an S-corp in Illinois?
Advantages of forming an S-corp include pass-through taxation, limited liability protection for shareholders, and the ability to issue stock to raise capital and transfer ownership.
Which type of business entity is more popular in Illinois, LLC or S-corp?
LLCs are more popular in Illinois than S-corps, mainly due to their flexibility and ease of operation.
How much does it cost to form an LLC or S-corp in Illinois?
The cost of forming an LLC or S-corp in Illinois varies depending on the type of business and the services that are required, but typically ranges from $100 to $400.
Does Illinois have any specific requirements for forming an LLC or S-corp?
In Illinois, LLCs and S-corps are required to file Articles of Organization with the Secretary of State and comply with certain tax and regulatory requirements.
Can a non-resident own an LLC or S-corp in Illinois?
Yes, non-residents can own and operate an LLC or S-corp in Illinois, but may be subject to additional tax and regulatory requirements.
Can an LLC or S-corp in Illinois have multiple owners?
Yes, an LLC or S-corp in Illinois can have multiple owners, known as members for LLCs and shareholders for S-corps.
Are operating agreements required for LLCs in Illinois?
Although not required by law, operating agreements are strongly encouraged for LLCs in Illinois to establish the rights and responsibilities of members.
Do S-corps have annual meeting requirements in Illinois?
Yes, S-corps in Illinois are required to hold annual meetings of shareholders and keep detailed records of these meetings.
How are LLCs and S-corps taxed in Illinois?
Both LLCs and S-corps in Illinois are generally taxed as pass-through entities, meaning that profits and losses are reported on the owners’ personal tax returns.
What types of businesses are eligible to form an S-corp in Illinois?
To qualify for S-corp status in Illinois, a business must meet certain federal criteria regarding the number and type of shareholders.
Can a single-member LLC be taxed as an S-corp in Illinois?
Yes, a single-member LLC can elect to be taxed as an S-corp in Illinois by filing Form 2553 with the IRS.
Are S-corps required to pay the Illinois corporate income tax?
No, S-corps in Illinois are exempt from the state corporate income tax, but shareholders are still subject to personal income tax on their share of the company’s profits.
Are profits and losses allocated equally among LLC members in Illinois?
Not necessarily. The allocation of profits and losses among LLC members in Illinois can be specified in the operating agreement, but defaults to an equally divided allocation if not specified.
Can a non-US resident form an LLC or S-corp in Illinois?
Yes, non-US residents can form and own an LLC or S-corp in Illinois, but may be subject to additional regulations and tax requirements.
Can someone have ownership in both an LLC and an S-corp in Illinois?
Yes, someone can have ownership in both an LLC and an S-corp in Illinois, but must comply with the respective laws and regulations for each entity.
Do LLCs and S-corps have different liability protection in Illinois?
No, both LLCs and S-corps in Illinois offer limited liability protection to their owners, meaning that personal assets are generally protected from business debts and liabilities.
Which type of business entity offers more flexibility in terms of profit distribution, LLC or S-corp?
LLCs offer more flexibility in profit distribution among members than S-corps in Illinois, which are subject to certain strict rules regarding profit allocation.
Can an LLC or S-corp be formed online in Illinois?
Yes, both LLCs and S-corps can be formed online in Illinois through the Secretary of State’s website or through a registered agent.
Can an LLC or S-corp in Illinois own another business?
Yes, both LLCs and S-corps in Illinois can own another business, as long as it aligns with their stated purpose and goal.
Are LLCs and S-corps required to have a registered agent in Illinois?
Yes, both LLCs and S-corps in Illinois are required to have a registered agent, which is responsible for receiving legal notices and other important documents on behalf of the business.
Can I convert my existing sole proprietorship to an LLC in Illinois?
Yes, sole proprietorships in Illinois can be converted to LLCs by filing Articles of Organization with the state.
Can S-corps have a board of directors in Illinois?
Yes, S-corps in Illinois can have a board of directors, but they are not required.
Can an LLC or S-corp in Illinois be dissolved voluntarily?
Yes, both LLCs and S-corps in Illinois can be dissolved voluntarily by the owners, as long as certain formalities and procedures are followed.
Can I change my LLC’s purpose in Illinois?
Yes, the purpose of a LLC in Illinois can be changed through an amendment to the operating agreement, existing ILD list or through articles of amendment.
Can an LLC have different types of voting interests?
Yes, an LLC in Illinois can have different types of voting interests, as long as it is specified in the operating agreement.
Is an S-corp in Illinois required to file an annual report with the Secretary of State?
No, S-corps in Illinois are not required to file an annual report with the Secretary of State.
What is an LLC in Illinois?
An LLC is a limited liability company formed under Illinois state law.
What is an S-corp in Illinois?
An S-corp is a type of corporation that is organized under Illinois state law.
Which is better for my small business in Illinois, an LLC or an S-corp?
The choice between an LLC and an S-corp depends on your business needs and goals, so it’s best to discuss your options with a qualified attorney or accountant.
Do LLCs have to pay Illinois state taxes?
Yes, LLCs in Illinois are required to pay state income taxes.
Do S-corps have to pay Illinois state taxes?
Yes, S-corps in Illinois are required to pay state income taxes.
Can an LLC convert to an S-corp in Illinois?
Yes, an LLC can convert to an S-corp in Illinois through the proper legal process.
Can an S-corp convert to an LLC in Illinois?
Yes, an S-corp can convert to an LLC in Illinois, also through a legal procedure.
How do I form an LLC in Illinois?
To form an LLC in Illinois, you need to file articles of organization with the Illinois Secretary of State’s office and pay the appropriate registration fees.
How do I form an S-corp in Illinois?
To form an S-corp in Illinois, you must first file articles of incorporation, create a corporate bylaws document, and obtain a Federal Employer Identification Number (FEIN).
What are the rules for naming an LLC in Illinois?
LLC names in Illinois must include the phrase “Limited Liability Company,” “L.L.C.,” or “LLC” in the business’s name.
What are the rules for naming an S-corp in Illinois?
The name of an S-corp must comply with the naming rules for any Illinois corporation and must not be too similar to an existing business name in the state.
Does Illinois require that my LLC have its own operating agreement?
While Illinois does not require LLCs to have an operating agreement, it is advisable to create one to establish operating protocols and safeguard individual accountable laws.
Does Illinois require that my S-corp have its own shareholder agreement?
While Illinois does not require shareholder agreements for S-corps, it’s a good idea to have one in writing to safeguard business interests and operating protocols to future-proof business continuity.
Can I have another Illinois LLC as a member of my LLC?
Yes, an Illinois LLC can be a member of another Illinois LLC.
Can I have another Illinois corporation be a shareholder of my S-corp?
Yes, an Illinois corporation can be a shareholder of an S-corp in the state.
What kind of taxes will I owe as an LLC in Illinois?
In Illinois, LLCs must bag LLC taxes and file them soon into the system
Do S-corp shareholders pay state taxes in Illinois?
In most cases, Illinois does not levy income tax on individual S-corp shareholders.
What is the annual fee for my LLC in Illinois?
The annual fee for an LLC in Illinois is imposed as Franchise Tax, headed $75.
What is the annual fee for my S-corp in Illinois?
In Illinois, S-corporations do not have to pay franchise tax, but they do have to pay a minimum annual fee of $25.
Can I change my LLC’s tax status if my business changes in Illinois?
Yes, in some conditions, you can change an LLC’s entire classification status from an entity level to an S-corporation as per the business process.
Can I change my S-corp’s tax status if my business changes in Illinois?
Yes, in some careful situations, you can withdraw your S-Corp estate in the proper directorship, change the Type of an application much ahead of operating.
Can both LLCs and S-corps have shareholders?
Yes, both LLCs and S-corps in Illinois can have shareholders.
Can an S-corp’s shareholders be individuals, trusts, and entities?
Yes, S-corp shareholders in Illinois may comprise of trusts, individuals, an ERISA trusted platform, the estates, and additional systems.
Can an LLC be single-membered in Illinois?
Yes, Illinois permits single-member LLCs.
Can an LLC be fabricated by anyone?
Although anyone can start an LLC, non-U.S. citizens may need certain requirements to ensure that business formation is legal.
What paperwork should I keep up if I form an LLC in Illinois?
Paperwork from an LLC includes quarterly reports, Annual Reports by budgetary season, and scheduled staff updates.
What paperwork should I keep up if I form an S-corp in Illinois?
Paperwork from an S-corp may include minutes of organizational meetings of directors and shareholders that describe business affairs recorded in stipulated connotation.
Can these entities be dissolved, leaving debts deserted with most disregard?
Depending on constraints, programs or opportunities, entities have the obligation to cater to accounts payable debt as part of winding-down to closure in accordance with business rules or formal prohibitions.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Illinois will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in Illinois and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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