Business Formation Law
When starting a business, it is important to decide under which type of legal structure the entity will operate. Selecting the correct entity is essential to the long-term growth and viability of your business. Your choice of legal entity should consider several factors including tax implications, asset protection, personal risk, management logistics, and future funding opportunities. Understanding and analyzing the nuances of legal entities is a challenging first step in the process of business formation.
The Chicago law firm of Roth Fioretti specializes in business formations, helping our clients navigate this complex area of business law. Our attorneys have decades of experience assisting Illinois small business owners, start-ups, and entrepreneurs with selecting and forming the proper business entity. Our attorneys focus on minimizing business risks and tax burdens, while ensuring we stay aligned with your goals and position your business to succeed.
Types of Legal Entities
In the state of Illinois, there are several types of business formations available. Below is a brief overview of the basic legal entities:
Illinois Sole Proprietorship and General Partnership
A sole proprietorship is the simplest form of business entity, as all responsibility is held by the owner of the company. Forming a sole proprietorship does not require the business owner to file any formal documentation aside from registering a “doing business as” name (if applicable) with the local county clerk’s office to comply with the Illinois Assumed Named Act. Additionally, a sole proprietor is not required to file a separate tax return for the business. The entity’s taxes are filed on the owner’s personal income tax return by attaching Schedule C to the Form 1040.
While administratively this is the easiest entity to establish, it is risky in terms of personal liability. Because there is no distinction between the owner and the business, it exposes the owner to substantial liability and puts the owner’s personal assets at risk. Funding poses another challenge for a sole proprietor, as there is no opportunity for people to buy shares in the company. For a sole proprietorship, obtaining outside investment is virtually impossible without accruing debt.
Illinois Limited Liability Company (LLC)
The most popular choice among small businesses, a Limited Liability Company (LLC), offers owners greater legal protection than a sole proprietorship. With an LLC, the business owner or owners cannot be held personally liable for the company’s debts or legal liabilities. This entity allows the owners to enjoy the protections of a corporation without the tax implications of incorporating. For federal tax purposes, a single member LLC is taxed as a sole proprietorship, while a multi member LLC is taxed by default as a partnership, unless the entity files an election to be treated as a corporation. Most LLCs opt for the default partnership federal tax classification to avoid double taxation of corporate income. To establish an LLC in Illinois, an entity must draft and file articles of organization with the state. The operating agreement is a separate document that defines the company’s management structure and other details like compensation and responsibilities.
Illinois Limited Liability Partnership (LLP)
Like an LLC, a limited liability partnership enjoys the tax benefits of a partnership and some of the legal protections of a corporation. In a partnership, there is a general partner, who is responsible for the operation of the business, and limited partners, who are investors in the business, much like shareholders in a corporation. Limited partners are sometimes called silent partners, as they have no control over the operation of the business. Taxes are based on the investment level of each partner, so there is no taxation at the business level, but legal liability falls upon each partner, dependent upon their level of investment, instead of the business itself. If the business incurs debts which cannot be paid from business income, the partners will be liable for said debt.
Illinois C Corporation
Though it’s the most complex type of legal entity, a C Corporation has virtually unlimited potential for growth and profit. Governed by articles of incorporation and bylaws, a corporation must have a board of directors, elected by the shareholders, who are responsible overseeing the company’s management. A corporation may sell shares of its stock to outside investors to grow the business, allowing ample opportunity for raising funds. While there is no limit to how many shareholders can invest in a C Corporation, once it reaches a certain size, it will be subject to some government control and regulation through the Securities Exchange Commission (SEC).
One drawback to this entity type is double taxation. The income of the corporation is first taxed at the entity level, and then again at the shareholder level, based on each shareholder’s distribution of the corporation’s profits and losses. Additionally, C Corporations can be costly to set up, as there are fees that must be paid for registration, but once a corporation is formed, it continues in existence even if the entity’s management changes. Legal liabilities for a C Corporation belong to the corporation itself, so investors, employees, and the board of directors are not personally responsible for the debts and liabilities of the corporation.
Illinois S Corporation
Organized and governed in the same manner as a C Corporation, an S Corporation is an elected federal tax status. For a C Corporation to make this tax election, there are several requirements to which it must adhere, including limiting the number of shares sold and restrictions on the distribution of profits. The major benefit of S Corporation status is no double taxation. As with a partnership, profits and losses are passed on to the shareholders to file on their individual tax returns. Legal liability is also limited in an S Corporation, so members are not responsible for the debts and responsibilities, which fall to the business itself.
Chicago, IL Business Formation Lawyers
Our team of legal experts is here to walk you through the business formation process. We’ll take the time to understand the vision for your business and help you choose the right type of entity to meet your needs. After selecting the appropriate entity, our attorneys will draft and file the needed documents and help you obtain the proper registrations and permits. With the team of Roth Fioretti guiding you through your business formation, your company will be well-positioned to thrive.