Sometimes the hardest part of entity formation is learning your options and deciding between them! There are a lot of varying opinions out there – we can help you break it down.

The worst option is to do nothing and operate as a sole proprietor (if there’s only one owner) or a partnership (if there are multiple owners) by default. This leaves you vulnerable to personal liability. You can schedule a consultation with an LLC attorney if you’re struggling to choose the right entity to limit your liability. Not in Chicago? No problem. G & G Law helps open businesses all across Illinois.

C-Corps are the traditional entity type and tend to be the default for “old school” businesspeople. However, there are a couple reasons they may be less than ideal for small and mid-sized businesses.

• CON: Double taxation. Double taxation means that C-Corps are taxed at the corporate level and the shareholders, who are the owners or partners in a C-Corp, are ALSO taxed on the money they make from the C-Corp. You should consult with an accountant to determine if this is a concern for you.
• CON: Formal requirements. C-Corps have many formal requirements to maintain C-Corp status. For example, they need to hold an annual meeting each year and keep organized meeting minutes. They must name officers and appoint a board of directors.
• PRO: Venture funding preference. Venture capital firms seem to prefer that businesses they invest in be structured as C-Corps, although it’s likely not the ideal choice for the founders. If your business will not survive without venture funding, you should probably consider C-Corp formation. However, this is something that may be changing as LLCs become more accepted.

A C-Corporation is formed by filing Articles of Incorporation with the Secretary of State. The owners of a C-Corporation are called “shareholders.” You should keep signed Bylaws and a Shareholders Agreement explaining how the business is run at a high level at the principal place of business, along with procedural voting documents and written minutes.

Many of our clients prefer LLCs (or PLLCs, for licensed professionals). They are simple, flexible, and easy to manage. This makes them ideal for small business owners, who have enough on their plates already! Here are some of the reasons we like ‘em.

• PRO: Avoid double taxation. “LLC” actually isn’t an IRS tax classification! The default taxation of LLCs “pass-through”. This means the LLC is a disregarded entity and taxed as a sole proprietorship (if there’s one owner) or a partnership (if there are multiple owners). However, LLCs can elect to be taxed as an S-Corp or C-Corp – which leads us to our next pro.
• PRO: Flexible. LLCs have flexibility in how they are taxed. They also are flexible in how profits and losses can be distributed – it doesn’t have to be in proportion to ownership amounts.
• PRO: Easy. LLCs have fewer legal formalities. You don’t have to have annual meetings, keep minutes, or appoint a board of directors. You certainly can if you want to, though.
• CON: Of course, an LLC may not be the right fit if your situation is highly complex (venture funding, international issues, complex taxes, etc.). And your retired accountant uncle may give you the side-eye, because, you know, “back in his day….”

LLCs are formed by filing Articles of Organization with the Secretary of State. The owners of an LLC are called “members”. You should keep a signed Operating Agreement explaining how the business is run at a high level at the principal place of business.