Like any business structure, setting up your business as an Illinois LLC, or limited liability company, can have both advantages and disadvantages. Whether a particular feature is an advantage or a disadvantage may depend upon the type of business structures you're comparing.
An Illinois LLC is considered advantageous because it offers the same limited liability as a corporation, but with less formality in its creation and operation. However, as will be seen, there is a bit more to it than that.
The Pros of an Illinois LLC
Flexible tax treatment. For federal tax purposes, an LLC can choose how it will be taxed. An LLC with one member (a single-member LLC) will be taxed as a sole proprietorship, unless it elects to be taxed as an S corporation or a C corporation. An LLC with two or more members (a multiple-member LLC) will be taxed as a partnership, unless it elects to be taxed as an S corporation or a C corporation.
LLC taxes in Illinois will depend upon the LLC's federal tax election. Unless an LLC elects to be taxed as a C corporation, all Illinois LLC profits are passed through to the members. The members will pay Illinois and federal income tax, and federal self-employment tax, on their share of the profits, even if they do not actually receive a share of the profits. An LLC taxed as a C corporation pays Illinois corporate taxes on its profits, and each member pays state and federal income taxes on any profits that are actually distributed to the member.
Limitation of liability. The owners of an LLC (called members) are not personally liable for the debts of the business, including debts resulting from most lawsuits against the company. This Illinois LLC asset protection feature is the main reason most people set up an LLC for their business. A corporation also affords limited liability, but the LLC requires less formality.
A limited liability partnership (LLP) also provides asset protection for all owners, but is more restricted regarding tax options. A limited partnership (LP) only limits the liability of the limited partners—not of the general partners who are engaged in the actual operation of the business. There is no asset protection for sole proprietors or partners in a general partnership.
Registration costs. Forming an LLC in Illinois involves filing articles of organization with the Secretary of State, and paying a registration fee of $150. Illinois LLC annual fees are $75. This is about the same as a corporation and limited partnership, but is less than the cost of a limited liability partnership (LLP), which is $100 per partner each year. Illinois also has what is called a Series LLC, which allows several distinct entities under one umbrella LLC; the registration fee for a Series LLC is $400.
Minimal formalities. A corporation has a three-tiered management structure, with shareholders, a board of directors, and officers. An LLC in Illinois may be managed by its member(s), or the members may select managers to run day-to-day operations. A corporation is required to hold an annual meeting of the shareholders, to hold board meetings, and to keep minutes of what takes place at those meetings. There is no requirement for the members of an LLC to conduct meetings or maintain minutes.
Flexible membership. There are no restrictions on the number of members of an LLC. With an S corporation, there cannot be more than 100 members. While a C corporation can have more members, the business will then be subject to double taxation, as well as more regulation regarding its operations.
The Cons of an Illinois LLC
Registration costs. As mentioned above, the initial fee for filing an LLC in Illinois is $150, with an annual $75 renewal fee. Sole proprietorships and general partnerships are not required to register, so there is no registration cost.
Registered agent. Unlike a sole proprietorship or general partnership, an LLC is required to have a registered agent for the purpose of receiving official documents, such as lawsuit papers and subpoenas. If your LLC designates a member or employee as its registered agent, there are certain office hour and staffing requirements that must be met. If your LLC hires an outside registered agent, it will cost from $40 to $500 per year, depending upon the agent you hire.
Difficulty raising capital. Unlike a corporation, an LLC cannot issue shares of stock to raise capital. Any new investor would need to become a member of the LLC, which is a more complicated process. Furthermore, many outside investors consider LLCs risky, and prefer to invest in corporations.
Difficulty obtaining loans. Banks and other lenders may be more reluctant to loan directly to an LLC than they would to a corporation. Members of the LLC may be required to personally guarantee a loan, which partially defeats the limitation of liability afforded by an LLC. However, limited liability would remain intact for other business debts, including lawsuits against the LLC. On the other hand, lenders can also require a personal guarantee from the owners of a small start-up business formed as a corporation.
More information to help you decide whether a limited liability company is the right structure for your business may be available through the Illinois Secretary of State's online resources. You may also find it advantageous to engage the services of an online services provider to help ensure that your LLC registration process goes smoothly.