There are many ways to organize your business in Illinois. These structures include sole proprietorships, general and limited partnerships, limited liability partnerships, limited liability companies, and “s” and “c” corporations. Some of the most popular business structures for small and new business owners are the sole proprietorship model and LLCs. Choosing the right business structure when starting up your own business is an important decision. The best fit for you will depend and you should consider factors such as the costs, government regulations, liability protections, and tax implications from each of these business structures. In this article, we will cover sole proprietorships and LLCs in Illinois specifically.
An LLC is established in Illinois when you file for one with the Secretary of State. Once your application is approved, Illinois will then recognize your business entity as legally separate from you. This has a few important implications that will be discussed further below. However, an important advantage for LLC owners is that they will no longer be held personally liable for the debts and liabilities of the company.
LLCs offer several advantages, including tax savings, liability protection, privacy (if formed anonymously), increased credibility, and more tax flexibility. One drawback is that there is added complexity when compared to a sole proprietorship for these added options to running your company. See below for a list of the advantages and disadvantages of an LLC.
A sole proprietorship, also referred to as a sole trader or a proprietorship, is an unincorporated business with just one owner who pays personal income tax on profits earned from the business. Most small businesses start off as sole proprietorships. It is the most straightforward type of structure to run your business. The business is treated as an extension of the owner. In other words, unlike LLCs, no legal distinction is made between the owner and the business. There are no necessary steps or documents you need to submit when operating a sole proprietorship.
Nonetheless, many people submit a “doing business as” request with their local county clerk’s office and obtain a Certificate of Assumed Name to take on an assumed name such as “Sprinkles and Cakes.” Without this certificate, the sole proprietorship must operate under the owner’s name, for instance, “Jackie’s Cupcakes.” Under the Assumed Name Act, Illinois requires sole proprietors to register with their local county clerk’s office if the business name is different from the owner’s full legal name. Illinois’ county clerks can be found at the web address https://www.iaccr.net/MemberCountiesMain.html.
There are several advantages to owning a sole proprietorship compared to other business structures, including convenience and simplicity. Unfortunately, with the convenience and simplicity, you may make yourself more susceptible to certain financial risks, especially as your business grows. Below is a list of the advantages and disadvantages of a sole proprietorship.
There are several categories to help distinguish between sole proprietorships and LLCs. These include liability, taxation, and management/ operational style.
Generally, sole proprietors own small or part-time businesses with no employees. It costs nothing to establish a sole proprietorship. Unlike a sole proprietorship, an LLC is a hybrid of the partnership and corporate forms that allows the liability protection of a corporation with the tax advantages of a partnership. As hinted above, this is a crucial difference between the two business structures. Sole proprietors are not protected from personal liability.
Another essential difference between LLCs and sole proprietorships is tax flexibility. Only LLC members can choose how they prefer to have their business taxed. Only LLC members can choose how they prefer to have their business taxed. They can also elect to have corporate tax status. Dividends are taxed at a lower rate than typical business income when the company is taxed as a corporation. Corporation retained earnings are also not subject to income tax. LLC members must pay taxes on all business income, whether retained or not. A corporation has eligibility for additional tax deductions and credits.
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A sole proprietorship is simple in its operations and management structure. The single owner can make any business decision as they see fit. Most sole proprietors can hire employees, experts, and other individuals to help with day-to-day choices with business management. However, the owner only has to ensure that their business operates legally and that the profits cover business expenses.
An LLC's operational and management structure is more intricate. Often it is outlined in an LLC operating agreement. The operating agreement details each member's stake in the business, voting rights, and profit share. The LLC can be collectively managed by all the members or an appointed manager.
If you operate your business as a sole proprietor, you’ll be taxed as a self-employed person, and the income of your business is considered your personal income for tax purposes.
An LLC may make an election to be taxed as a disregarded entity, partnership, corporation, or s-corp. If such an election isn’t made, it’s taxed as either a disregarded entity or a partnership, depending on the number of members it has.
While deciding, strongly consider partnering with Bench's skilled professionals. They'll help organize your finances, maximize deductions, and ensure an efficient filing process for the current year.
Business owners often start with sole proprietorships. It requires minimal paperwork and is simple in design, as shown previously. Once the business grows, transitioning to LLC may have the advantage of offering protection against personal liability for bankruptcy.
Those who want personal liability protection, tax benefits, growth potential, credibility, and consumer trust should strongly consider forming an LLC. It is recommended for businesses with more extensive customer bases, increased risk of liability and/ or loss could potentially benefit from unique tax options and have the possibility for immediate sustainable profit. One immediate downside is the fees and more complex formation process than sole proprietorships. However, this can easily be made up for with the benefits your business can assume by establishing your company as an LLC.
Sole proprietorships work well for small-scale, low-risk, and low-profit businesses. Therefore the risk on an owner’s personal assets is minimal. The best business structure will depend on many factors, and it's recommended that you speak to a business lawyer before deciding.
You can find the forms needed to establish an LLC and any additional information for running a sole proprietorship at the following web address.