Getting Started on LLC vs Corporation: What You Need to Know in Chicago
Are you ready to transition your business from a small or unregistered entity to a larger and more legally protected operation3 min read
Are you ready to transition your business from a small or unregistered entity to a larger and more legally protected operation? Choosing between setting up a Limited Liability Company (LLC) or a Corporation can be a difficult and intimidating decision and understanding the nuances of the different formations can be complicated. Further, deciphering the local regulations and requirements can seem challenging. If you are based in Chicago and require legal counsel that can provide sound advice on the mechanics of this transition, we’ll discuss everything you need to know to make the most informed decision.
First, it is important to note that setting up an LLC or a Corporation is roughly the same process across the United States. You will file Articles of Organization with the Secretary of State, where your business is located, and you will need to obtain a federal Employer Identification Number (EIN). Your legal counsel should be familiar with the Internal Revenue Service’s (IRS’s) code, which provides certain benefits and deductions for different organizations. You will also need to register for any state taxes you will owe. However, what differs between LLCs and Corporations is what you should expect after the filing process.
Immediately after forming an LLC, it will be a pass through entity, meaning the company's profits and losses will be passed through to the owners' personal income. This pass through status also allows you to deduct business expenses in the same tax year that you incur them, which can be beneficial to small businesses. Additionally, LLCs, as well as corporations, are afforded certain protections when it comes to liability, meaning your personal assets are protected from the liabilities and debts of the company.
On top of these considerations, there are a few nuances that are specific to operating a business as an LLC in Chicago. For example, the Illinois Limited Liability Company Act does not require businesses under 500 members to keep written operating agreements. However, it is still recommended to do so in order to ensure there are clearly defined regulations and expectations for the members of the LLC. Further, LLCs are required to register with the Department of Revenue if they expect to pay athletes or entertainers for their services in Chicago.
In contrast, corporations operate under separate legal entities and cannot “pass through” their losses or incomes. This means that the company will need to file separate tax returns and pay taxes separately. However, corporations are often eligible for lower taxes, which can reduce the operating costs for businesses that are just starting out. Additionally, corporations are not limited to the number of shareholders they can have. Further, corporations may be eligible for more grant and funding opportunities.
Similar to the regulations governing LLCs in Chicago, the General Not For Profit Corporation Act requires corporations to have a written corporate agreement. Additionally, corporations must obtain a Certificate of Good Standing from the Secretary of State in order to conduct activities and transactions in accordance with their organizational document and by-laws. Finally, corporations must register their business name with the Secretary of State and will be required to pay certain taxes specific to funds earned in Chicago.
Overall, both LLCs and corporations have varying benefits, depending on the size, type, and goals of your business. Therefore, it is essential that you consult with local attorneys when deciding upon the best formation for your company. UpCounsel, an online platform for legal services, connects you with experienced business attorneys who can provide sound advice on the best formation for your business transition.