If you are a business owner in Illinois, especially a sole proprietor or partner, you may have asked yourself, do I really need to form a limited liability company (“LLC”). The likely answer to this question is yes. As every situation is different, a business owner would need to weigh the pros and cons of forming an LLC, but for small to mid-size businesses, the benefits outweigh the drawbacks in most circumstances.
The main reason an LLC is formed is to benefit from the limitation of liability it offers. The owners of an LLC are not personally liable for the debts of the LLC business. For instance, if there is a lawsuit that results in a judgment against the business, the personal assets of the owners (home, car, etc.) are protected from being seized. A sole proprietorship or partnership does not offer any such protections. A corporation form of business offers similar protections, but has greater formality, increased costs, and undesirable tax consequences.
Although the corporate form of business offers limitation of liability as well, corporations are subject to dual taxation. The entity is taxed on profits at the corporate level, then taxed again when the individual receives the payouts from the corporation. In contrast, an LLC is only taxed once (unless it elects to be taxed as a corporation). An LLC by default is taxed only at the individual level, as a sole proprietorship if it has one owner, or as a partnership if multiple owners.
As compared to incorporating, an LLC offers the benefit of minimal formalities, lower start-up costs and registration costs, and flexible membership. Corporations are required to have management structures, hold meetings of board and shareholders, and maintain minutes and records. The LLC formation does not require the formalities of meetings and minutes, as well as the owners can directly manage the business. Because of the formalities required by a corporation, there are greater costs to setup, and the initial registration and yearly fees are greater. Also, in the case of an S corporation, there are limitations on the number and type of owners, whereas LLC does not have such restrictions.
There are a few drawbacks to forming an LLC, but in most instances, they are minimal, and the benefits greatly outweigh them. There are registration costs, renewal fees, and a requirement for the LCC to maintain a registered agent to receive official documents. These expenses are not applicable to a sole proprietorship or partnership, but they are minimal and could be viewed as being an inexpensive insurance policy to protect your personal assets. Another possible drawback with an LLC is obtaining a loan, but the same difficulties are encountered with sole proprietorships and partnerships. If the LLC is not well-established and has minimal assets, a lender may be reluctant to loan directly to the company and could possibly require a personal guarantee of the owner(s), defeating the benefit of limitation of liability regarding the loan. The LLC would still maintain the benefit of the limitation of liability in regard to other matters though.
With the costs and continuing formalities of creating an LLC being minimal, and the limitations of liability and tax benefits being great, anyone operating a business in Illinois should consider this form of business structure.
Written by: Derek Luster