When an entrepreneur in Illinois is deciding on their business structure, one of the first things they should consider is whether they want to be held personally liable for business debts.
Generally, in a sole proprietorship, the founder/owner of the business is working alone and will therefore be liable for any business debts that arise. Any business income or profits will also be reportable on their income tax returns. The same goes for general partnerships, in that both owners will be personally liable for business debts and will report income and profits from the business on their personal income tax returns. Additionally, the partnership must file an informational tax return.
For those looking for less personal liability, a limited partnership may be a good option, as long as they are not the general partner. In a limited partnership, the owner who is considered the general partner will be involved in the management process and will be personally liable for business debts. The other partner however, will act as more of an investor and will not have as much say-so in the running of the business. As a result, this limited partner will not be personally liable for business debts. However, both the general and limited partner can report business income or profits on their personal tax returns and the limited partnership will also file an informational tax return.
For those who do not want any personal liability for business debts, a corporation (C-corp or S-corp) or limited liability company may be the best choice. C-corp profits are subjected to ‘double taxation,’ in that profits will be taxed before being distributed to shareholders and after. S-corp profits however are not subjected to ‘double taxation’ and shareholders can report their distributions on their personal tax returns. L.L.C. members can report business income on their individual tax returns and the L.L.C. will file an informational tax return with the IRS, just like general and limited partnerships.
Liability is an important factor to consider when determining your business structure. A business law attorney in your area can answer any questions you have on liability and help determine which structure is best for you.