Making decisions about business entities can be overwhelming to many entrepreneurs and business owners. In Chicago alone, the landscape of various business types can be complex and diverse. One of the most essential questions to answer is whether a LLC or an S corporation might be the right entity type for a Chicago business.

Both LLCs and S corps offer appeals of business status and tax advantages. Therefore, they can be the perfect entity types for a wide range of businesses. On the other hand, striking the wrong legal framework when setting up a business can cause legal as well as financial headaches for business owners. With some guidance, however, choosing the right entity type for a particular Chicago business is not an insurmountable task.

Making the Choice between LLCs and S corps

Limited Liability Companies (LLC) are popular business entities for small businesses. LLCs offer a hybrid status that provides independent members of a business with limited liability protecting them from personal liability in the event of a lawsuit. In contrast, an S corporation provides similar limited liability protection for similar businesses, but S corporations are limited to a certain number of shareholders and eliminate the possibility of the corporate income being subject to double taxation.

Managing Tax Implications

When deciding to form a business entity in Chicago, tax considerations should be kept in mind. LLCs are generally pass-through entities which means that their income and losses are reported directly on their members’ income tax returns. Similarly, S corporations are also pass-through entities and their members deduct their business losses on their tax returns against any income they may have earned through the company.

In addition to double taxation, another tax consideration for S corporations is the requirement that the company calculates the cash distribution paid out to shareholders each year by the company during the course of the current reporting period. Furthermore, the annual franchise tax for LLCs or members of the LLC should be taken into consideration; this tax is applicable if the LLC chose the default “flow-through” status.

Ongoing Obligations of Each Entity

LLCs and S corporations each have different ongoing obligations associated with them. LLCs must follow government guidelines that include filing an annual report with the state entity responsible for the governing of LLCs. In addition, LLCs must meet ascertainable standards related to the duties, practices, and obligations. S corporations, on the other hand, require greater level of formal corporate structure; they must file annual reports and keep corporate minutes for record keeping purposes. Furthermore, the board of directors of S corporation need to meet at least annually and asset ownership should also be kept up-to-date with the appropriate paperwork.

Consult with Skilled Attorneys

Business attorneys in Chicago can provide valuable advice and guidance on selecting the right business entity type. Expert counsel can bring clarity to the decision-making process and help business owners make the most informed choice when selecting between an LLC or an S corporation.

Moreover, experienced business attorneys can explain the associated terms and concepts that are associated with LLCs and S corps. Having clarity on the differences between an LLCs and S corporations can help business owners make more informed decisions. Additionally, business attorneys are able to talk through the fiscal implications of formulating an LLC or S Corp and how it can affect other business decisions including tax compliance, compensation, and more.

Timing matters when it comes to setting up a business entity. With expertise from UpCounsel’s network of business attorneys, getting started with LLCs and S corps is made simpler and more efficient. With an extensive background of experience, they can provide tailored advice and counsel for business owners in Chicago, giving them the legal guidance they need for their various business needs.

Topics:

LLCs,

S corps,

Chicago