FAQs on LLC vs S Corp in Chicago
Executive Seeking Guidance: Choosing the Right Business Structure in Chicago2 min read
Are you an executive looking for legal support from business lawyers in Chicago but don’t know which type of business structure is right for you? This article provides answers to some of the most frequently asked questions (FAQs) about choosing between LLC and S corp structures. It helps business owners identify potential issues, save time, and make an informed decision.
The two most popular types of business structures are the LLC and the S Corporation. Both offer legal protection and asset liability protection to business owners as well as tax advantages. But which one is right for you? This article answers some of the more frequently asked questions when it comes to LLCs and S Corporations for businesses in Chicago.
What is an LLC?
Limited Liability Companies (LLCs) are hybrid legal and tax entities that are easy to set up and maintain. Enough of formalities related to governance, reporting, and filing of necessary the documents are not required with LLCs. An LLC combines some tax features of corporations, like partnership businesses, with the limited liability of a corporation. When creating an LLC, the owners must include the word "LLC" or limited liability company in their business name, and they must pay an annual fee in the state of Illinois to keep it current.
What is an S Corporation?
S Corporations, or Subchapter S Corporations, are for-profit entities that pass income, losses, deductions, and credits through to shareholders, who then take responsibility for taxes on their own individual returns. They usually have more favorable tax rates than regular corporations, but unlike LLCs, require more formalities in terms of governance, reporting, and filing of the necessary paperwork.
What are the advantages of an LLC vs. S Corporation?
For business owners in Chicago, the LLC is usually the preferred option as it is more flexible in terms of taxation, asset allocation, and corporate governance. LLCs offer important tax advantages in that the owners only pay income taxes on their share of the profits, rather than a corporate tax rate of up to 35 percent. LLCs also offer more protection from personal liability, as owners are not responsible for the debts and liabilities of the business.
On the other hand, S Corporations offer significant tax advantages, with owners paying only income taxes and state and federal taxes on their portion of the profits. Because of the flexibility that they offer, S Corporations are more suitable for businesses that have more investors and/or shareholders, allowing them to split up the earnings amongst many different stakeholders.
Which structure is better?
The right structure for your business depends on your individual needs. For small businesses in Chicago, an LLC provides a simpler and more cost effective structure to protect owners and investments. For businesses that have many investors or shareholders, an S Corporation may be the better choice.
At the end of the day, the decision of which structure is right for your business should be made after careful consideration of all the factors. Working with experienced business lawyers can help ensure that all the legal and tax issues have been taken into account when making this important decision.