Subchapter S Versus LLC Showdown…

For many new Illinois businesses the choice will come down to two of the most often considered types of corporations: Subchapter S (S Corp) and LLC (Limited Liability Company).

Here are some key points about each type of incorporation:

Both owners of S Corporations and Limited Liability Companies have limited personal liability. In contrast, sole proprietors and partners have unlimited personal risk and are at the mercy of the court’s decision.

Both offer protection of personal assets but allow income and losses to be reported on a personal tax return.

Nolo’s Legal Guide for Starting and Running a Small Business states, “For the majority of small businesses, the relative simplicity and flexibility of the LLC make it the better choice. This is especially true if your business will hold property, such as real estate, that’s likely to increase in value.”

Both Subchapter S corporations and Limited Liability Companies help owners avoid  “double taxation” and to pay income taxes on a flow-through basis like sole proprietors and partners.

A LLC can be formed in 1-step. With a Subchapter S corporation a general for profit corporation must be formed first. (this is a small advantage)

An LLC need not hold annual meetings or to keep formal minutes, but a S Corporation is required to do both.

Members of a limited liability corporation can split gains and losses as they wish. With a S corporation, shareholders must receive dividends according to the number of shares that they own.

Limited Liablity companies can be owned by individuals or businesses or any combination of each. S corporations can only be owned by US citizens and resident aliens. Usually no other entities can own a subchapter s corporation.

If operational ease and flexibility are important to you, an LLC is a good choice. If you are looking to save on employment tax and your situation warrants it, an S corporation could work for you.

Here is a chart that shows some differences between Subchapter S (S Corps) and LLC’s.

Factor	Subchapter S Corp.	Limited Liability Company
Liability Protection	Yes	Yes
Control	Board of Directors/Officers	Managed by members or managers
Federal Income Tax	Pass-through	Pass-through
Simplicity of day to day operation	Some formal requirements such as record keeping, annual meetings, etc.	Simple
Ownership Restrictions	Yes	No
Flexibility in Profit-Sharing	No	Yes
Employment Tax	Employment tax on salary, not dividends paid to shareholders	Self-employment tax on net income

More Subchapter S information:

Subchapter S Incorporation Advantages and Disadvantages – There are a number of options for business owners to consider when incorporating.

What is a Subchapter S (S Corporation)? - Subchapter S is an IRS designation for a Profit Corporation that distinguishes it…

Incorporate your Subchapter S – (S Corporation) online now.

More LLC information:

LLC Advantages and Disadvantages – There are many advantages and some disadvantages you should be aware of…

What is a Series LLC? – The State of Illinois allows for registration of a Series LLC if you are planning…

What is a LLC? – LLC incorporation has become a very popular form of incorporation over the years….

Incorporate your LLC now using our online form.

LLC Advantages and Disadvantages

There are many advantages and some disadvantages you should be aware of if you’re considering incorporating your Illinois business as an LLC.

This list is by no means inclusive, but includes some of the more commonly mentioned LLC advantages and LLC disadvantages in business articles.

LLC Advantages

“Check the box taxation” – LLC’s can choose taxation as one of the following: C Corp, S Corp, Partnership, Sole Proprietorship.

LLC’s have “limited liability”. Kind of the whole point – It means that the LLC owners (members) enjoy some protection from liability for acts and debts of the LLC.

Conserve paperwork, administrative/ record keeping versus a typical corporation.

Pass-through taxation – meaning, there is no double taxation on the corporation and on personal taxes for owners, unless the LLC chooses to be taxed as a “C-Corporation”.

LLCs in most states are treated as entities separate from their members.

Most states allow 1 person LLC’s.

Membership interests can be assigned, gain of those interests can be separated and assigned.  The person assigned receives economic benefits of distributions of profits/losses similar to a partnership, without transferring the title to the membership interest.

If the LLC hasn’t chosen taxation as a corporation, the income of the LLC generally retains its character as capital gains or as foreign sourced income, in the hands of the members.

LLC Disadvantages

Although there is no statutory requirement for an operating agreement in most states, members who operate without one may run into problems.

LLC owners might have more difficulty raising capital for their LLC as traditional investors may prefer more traditional corporate structure.

Many states add franchise tax or capital values tax on LLC’s.

Lenders, creditors may require LLC members to personally guarantee the LLC’s loans, thus making the members personally liable for the debt of the LLC. This removes one of the advantages the LLC gives owners and members, that of limited liability for debts…

Unfamiliar management structure.

Taxing jurisdictions outside the US are likely to treat a US LLC as a corporation, regardless of the way the US looks at the LLC for tax purposes.

LLC’s are rather new. Some states don’t treat LLC’s in the exact manner as corporations for liability purposes.

Principals in LLC’s have many different titles. At times it’s difficult to determine who has the authority to do what.

More LLC information:

What is a Series LLC? – The State of Illinois allows for registration of a Series LLC if you are planning…

What is a LLC? – LLC incorporation has become a very popular form of incorporation over the years….

Incorporate your LLC now using our online form.

What is a Series LLC?

The State of Illinois allows for registration of a Series LLC if you are planning to incorporate many Illinois companies as LLC’s. Primarily, the main benefit is saving some money if you want to have many LLC’s branched off under one main company.

Here is a definition of a series LLC from Wikipedia:

A series limited liability company, commonly known as a series LLC, is a special form of a limited liability company that provides liability protection across multiple “series” each of which is theoretically protected from liabilities arising from the other series.[1] In overall structure, the series LLC is comparable to a corporation with several subsidiaries.

More on series LLC’s from “Why Use a Series LLC” at Ezinearticles.com…

In order to create a series LLC, special language must be included in the Articles of Organization, which is filed with the Illinois Secretary of State. A Certificate of Designation for each series apart of the LLC must also be filed with the Articles of Organization.

But keep in mind, obtaining and preserving separate liability status requires that each series be operated as a separate entity. This means separate records should be kept for each series, with the assets of each series identified. Unfortunately, case law is largely undeveloped for the series LLC structure. This is especially true in Illinois. Without the benefit of judicial decision, many facets of the new series LLC legislation may be subject to reasonable difference in interpretation. For instance, some practitioners have argued that it is safe practice to provide each series with a separate bank account.

If you’re planning on forming an Illinois series LLC we think it’s best to contact an Illinois lawyer familiar with the process and all the legal intricacies involved. You can return here to this site to file your initial series LLC and save a couple hundred or maybe thousands of dollars off lawyer fees so be careful not to agree to process the registration of your LLC with the lawyer.

More LLC information:

LLC Advantages and Disadvantages – There are many advantages and some disadvantages you should be aware of…

What is a LLC? – LLC incorporation has become a very popular form of incorporation over the years….

Incorporate your LLC now using our online form.

What is a LLC?

LLC incorporation has become a very popular form of incorporation over the years. What is a LLC?

Wikipedia says a LLC is…

“A limited liability company (abbreviated L.L.C. or LLC) in the law of the vast majority of United States jurisdictions is a legal form of business company that provides limited liability to its owners. Often incorrectly called a “limited liability corporation” (instead of company), it is a hybrid business entity having certain characteristics of both a corporation and a partnership. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation and it is well-suited for companies with a single owner.”

Here’s another definition for LLC…

Limited liability companies (LLC) offer protection from personal liability for debts incurred by businesses, like a corporation does. Unlike a corporation, which must pay its own taxes, an LLC is a “pass-through” tax entity. Profits and losses from the business “pass-through” to the corporation’s owners that must report these on their personal US tax returns like they would if they were owners of a partnership or sole proprietorship. Operating an LLC is considered much easier than running another type of corporation, though it is generally a bit more difficult than setting up a sole proprietorship or partnership.

USLegal.com gives a comprehensive definition that sums it up…

The limited liability company or LLC is not a partnership or a corporation. It is a business structure that is a hybrid of a partnership and a corporation. Its owners are shielded from personal liability and all profits and losses pass directly to the owners without taxation of the entity itself. To form an LLC, articles of organization must be prepared and filed with the state and filing fees, initial franchise taxes, and other initial fees must be paid.

An LLC is owned by its members. They are analogous to partners in a partnership or shareholders in a corporation, depending on how the LLC is managed. A member will more closely resemble shareholders if the LLC utilizes a manager or managers, because then the members will not participate in management. If the LLC does not utilize managers, then the members will closely resemble partners because they will have a direct say in the decision making of the company. An LLC can have an unlimited number of members (owners) and non-US residents can be members of an LLC. LLCs are allowed to have subsidiaries without restriction and can be owned by another corporation. A corporation requires formalities, annual meetings of shareholders and directors are required each year and meeting minutes are required to be kept with the corporation’s records. LLCs are not required to hold such meeting; however, it is a good idea to document major decisions of the company.

While a corporation’s existence is perpetual, an LLC typically has a limited life span. Most states require that an LLC list a dissolution date in its articles of organization and certain events such as the death or withdrawal of a member can cause the LLC to dissolve. Also, typically the approval of the other members must be received to transfer shares in an LLC.

More LLC information:

LLC Advantages and Disadvantages – There are many advantages and some disadvantages you should be aware of…

What is a Series LLC? – The State of Illinois allows for registration of a Series LLC if you are planning…

Incorporate your LLC now using our online form.