Starting up a business is an exciting prospect. However, it can be stressful, too, and not quite as easy as you may initially think.
There are a number of different factors to consider in starting a business, many of which relate to legal requirements that are not common knowledge.
One of the significant factors in starting a business is choosing the right type of legal business structure. The structure you choose will have a material effect on your company's income and payroll tax liability, and consequently your ability to conduct business while preserving after-tax income and cash flow.
These are some of the more commonly used business structures in Illinois.
Sole Proprietorship or General Partnership
The most basic type of business structure in Illinois is the sole proprietorship. This type of business structure is the type typically used when a small business is first started. If two or more people are in business together as co-owners, then it is a general partnership.
A sole proprietorship or general partnership gives the business owner(s) complete control with little or no overhead for legal fees in its formation. This structure, however, completely exposes the business owner(s) open to complete personal liability. Should your business come into any legal trouble, your own personal assets and possibly your future income will be at risk.
So, while it's easy and very common to start and operate a business as a sole proprietorship or a general partnership, it creates no separation between your business and the owner(s) as individual (s). There are alternatives that shelter your assets outside of your business, such as your home, life savings and other personal property, from potential claims of creditors or employees of your business. The more common alternative structures are discussed below.
Limited Liability Partnership
A limited liability partnership is very similar to a general partnership, differing because the two or more people who own the business have a formal business document and register their name and business with the Illinois Secretary of State.
This type of structure is usually good for those who are seeking the capital and intellectual property of several people, and who desire some form of asset protection for their personal and other assets outside of the business.
The primary shortcoming of a limited liability partnership is that all members of the partnership can be liable and responsible for business debts if they act as a general partner, and play an active role in operating the business. In essence, if somebody does more than simply contribute capital, he or she can lose more than their investment by creating general liability.
Limited Liability Company
Similar to a limited or general partnership, but also similar to a corporation, is the limited liability company, or LLC. Since 1989, this has become a very popular vehicle for operating a business.
This type of structure is good for those want individual protection from liabilities of operating the business, and from other partners' legal missteps. It's also a good choice for those who want to report company profit losses and gains in a tax efficient, or "flow through" manner, on their individual income tax returns. An LLC structure also provides great flexibility for optimizing tax results, raising capital from entities other than natural persons, and an exit strategy for selling the business.
There are some downsides to a LLC, compared to a corporation, particularly in a service business where the principal income generator is work of one or more individuals, with little or no capital at risk. The downsides for an LLC compared to a general partnership or a sole proprietorship are generally legal and tax preparation costs and fees.
The oldest limited liability business structure in Illinois is the corporation. There are several different types of corporations for state law purposes. For federal and state income tax purposes, there are generally two types of corporations, C corporations and S corporations, which are not distinguished in the public records, but only with the type of tax return the business files with the IRS.
Corporations have as their owners two or more shareholders, with potentially more than one type of stock ownership. Each individual shareholder owns a certain percentage of the company, with an attached bundle of ownership rights, closely defined by various corporate documents. For the most part, all shareholders, regardless of their role in the business, have almost full legal liability protection.
C and S corporations differ only for tax purposes, and in the way that they are taxed by the IRS and the various states. If you're looking for more information and details on the benefits of how they work, you would be best served by speaking with a business attorney familiar with these tax benefits.
Deciding to register your business as a limited liability partnership, an LLC, or a corporation is a very big step; one that can have significant legal and financial effects and benefits. You would be best served by getting competent advice on the relevant issues before proceeding you're your choice.
Need Help Sorting Through the Different Types of Business Structures in Illinois?
When starting up a business, choosing the right type of business structure is vital. If you need help sorting through the different types of business structures, we here at John J. Pembroke & Associates can help.
Our team of lawyers possesses decades of experience in business and related tax law, and are able to assist in ensuring that you're making the right choice for your business operations. We'll be there to guide you every step of the way.
Contact us today to schedule an appointment!