Creating an S corp in Illinois could have tax advantages for certain businesses. “S corp” stands for Subchapter S corporation and is a tax election geared toward small businesses. But what’s the process for getting this status, and who qualifies? We’ll attempt to answer these questions as we show you how to open an S corporation in Illinois.
For a limited liability company (LLC), filing as an S corp may provide savings on self-employment taxes in some cases. For C corporations, it can be a way to avoid double taxation. For more information about S corps, see our “What Is an S Corporation?” page.
You should understand that an S corp isn’t a business structure or a separate legal entity. It’s a federal tax classification that either an LLC or a corporation can apply for with the Internal Revenue Service (IRS) if it meets the criteria. We’ll outline those criteria and the steps you would need to take to file as an S corp if you decide that it’s right for your business. We’ll also cover how an Illinois S corporation is treated for state taxes.
The IRS has some S corporation filing requirements and limitations you should be aware of before you begin this process. Specifically, to qualify for S corporation election, an entity must:
If your business entity meets these requirements, you can apply for an S corporation election.
Prior to setting up an S corp in Illinois, you’ll need to create either an LLC or a corporation if you haven’t already done so. Then, you’ll file an election form with the IRS. In Illinois, you don’t need to make a separate S corporation election at the state level.
If you’re ready to learn about filing as an S corporation in Illinois, we’ll walk you through it. First, we’ll show you how to form an LLC in Illinois. If you’d rather form an Illinois corporation, follow the instructions on our Illinois corporation page. Then, in Step 6, we’ll explain how to file for S corp tax status as either a corporation or LLC.
The first step is to name your Illinois LLC. From a marketing standpoint, you’ll want to choose a name that’s memorable and quickly explains what your business sells. From a legal standpoint, you’ll need to follow a few guidelines for LLCs:
For more naming guidelines, check with the Secretary of State’s Department of Business Services.
Once you confirm that your desired name is available, we can help you reserve your business name. That way, you can prevent others from taking it while you finish the business formation process.
Appoint your LLC’s registered agent. A registered agent is an individual or business that receives important legal notices on behalf of your business.
Your Illinois registered agent must:
The agent’s responsibilities include:
Legally, you can serve as your own registered agent, but there are several reasons why this isn’t the best idea. Just two of the pitfalls include:
Many LLC owners opt to use a professional registered agent service. The benefits of services like ours include:
Our registered agent services can set you up with a reliable agent.
The next step is to file Articles of Organization. Your Illinois Articles of Organization (Form LLC-5.5) is the document that, once approved, officially registers your LLC with the state.
To form your LLC, you’ll file these documents with the Illinois Secretary of State Department of Business Services, Limited Liability Division, and pay your filing fee ($150 at the time of this writing). You can file your Articles of Organization via postal mail, in person, or by completing the online application.
Remember, we can handle this paperwork for you with our business formation services, giving you the peace of mind of knowing that your paperwork is being filed correctly.
Creating an LLC operating agreement is the next step. An operating agreement in Illinois is a critical document for your LLC, even if it’s not required by law. An LLC operating agreement usually covers the rules your company will follow, lists LLC members, each member’s ownership percentage, and much more.
The operating agreement also discusses how finances will be handled and how decisions will be made (including management and member voting structure). It’s essentially the agreed-upon rules for your LLC for you and the other members. Once signed by all members, it’s legally binding.
We help you get started on the right foot by offering an easy-to-follow operating agreement template.
Get an Employer Identification Number (EIN) from the IRS. Many LLCs, including those with employees or more than one member, are legally required to obtain an EIN, also known as a Federal Tax Identification Number. Banks usually require an LLC to have an EIN to open a business bank account. This nine-digit number is used for tax purposes and other financial paperwork.
We can obtain this number for you with our EIN service.
Submit the form to apply for S corporation status. Once your LLC or corporation formation is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, with the Internal Revenue Service to get S corp status.
The IRS requires that you complete and file your Form 2553:
One caveat for limited liability companies wishing to file as an S corporation: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail.
Note that all of the shareholders/members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.
While S corporation classification does come with benefits for some businesses, making this election might not be right for every company. Carefully weigh the pros and cons before deciding how you want to move forward. Consult a tax professional about whether the S corporation election would be best for your business.
The advantages of filing as an S corporation for an LLC differ from the advantages for C corporations. Let’s look at the advantages for LLCs first.
By default, a traditional LLC already has pass-through taxation, so the benefits of S corp election for an LLC have to do with self-employment taxes. This takes some explanation, but for certain LLCs, it could save a lot in taxes.
The members of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on the profits received from the LLC. This is more than the taxes they’d pay for Social Security and Medicare when working for someone else because their employer would pay part of them.
But when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee of the LLC. Once they do that, they only pay Social Security and Medicare taxes on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members must still pay personal income tax and all other applicable taxes on their share of the profits.) Money paid out as salary is also a tax-deductible expense for the business.
One caveat to this arrangement is that the IRS expects you to pay yourself a “reasonable” salary as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $5 and avoid contributing anything to Social Security and Medicare.
But what is “reasonable compensation” to the IRS? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While the terms aren’t completely defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning for the same work.
If the IRS determines that your salary isn’t reasonable, it has the authority to reclassify your non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases have supported their right to do this.
Having an LLC with S corp status can also have drawbacks over a traditional LLC:
As we listed above, S corps have more qualifications to meet than a standard LLC. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have these limitations.
Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS tends to monitor LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter.
In fact, S corp owners may want to observe some of the same formalities that C corporations do. LLCs don’t have the same level of financial and professional regulation, and don’t have to create corporate bylaws or elect corporate officers for your business venture, but it might be wise to keep a corporate records book, even if you’re not legally required to do so. It could help you stay prepared in the event of an audit.
Having an S corporation generally means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to start doing so. Your taxes will be more complex, as well.
These added complications could mean that you’ll have higher administrative costs. You may find that you need an accountant, bookkeeper, and/or a payroll service or software.
If you have a C corporation (the default form of corporation), filing as an S corp does have its advantages:
One big disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the corporate level. But when those profits are distributed to the individual owners (shareholders) as dividends, the profits are taxed a second time on the shareholders’ personal tax returns.
But when a C corporation qualifies to be an S corp, those profits are usually only taxed at the individual level, at least for federal income tax. The business itself usually isn’t taxed on them. This is called “pass-through taxation,” and it’s how business entities like sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.
We need to add here that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. So, the disadvantages of double taxation aren’t as severe now as they once were.
Just as business profits pass through to the owners of an S corp, so do the losses. Unlike the shareholders of a C corporation, S corporation owners can write off the company’s losses on their personal income statements.
This can help offset their income from other sources and can be helpful if the corporation loses money in the first couple of years. Still, make sure you’re aware of the IRS’s shareholder loss limitations.
Under the previously mentioned Tax Cuts and Jobs Act, some S corp shareholders may be able to deduct up to 20% of their qualified business income (QBI). This deduction isn’t available to C corporation shareholders.
QBI is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for more details).
S corporation status also has its downsides over a standard corporation:
As we mentioned, an S corp can’t have too many business owners, no more than 100 shareholders. A C corporation has no such restriction. That limitation could be an issue later if the corporation expands and goes public.
All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could limit your ability to expand internationally. You also can’t have partnerships or corporations as shareholders. C corporations don’t have these limitations.
Corporations sometimes attract investors by offering preferred stock. That’s fine for C corporations, but the IRS doesn’t allow it for S corps.
Because of the extra restrictions, the IRS watches corporations with S corporation election more closely to see if they’re in compliance. In other words, your corporation is more likely to get audited.
We can’t stress enough how important it is to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, and they may also be able to help you find additional tax savings you were unaware of.
In an S corp, the business itself doesn’t usually pay federal income taxes. But what about Illinois taxes?
Under the Illinois Income Tax Act, any corporation that elects S corporation status for federal income tax purposes is automatically an S corporation for the purposes of Illinois income tax. In other words, an S corp has the same pass-through taxation for state income taxes as it does for federal income taxes, at least as long as the federal S corp status remains in effect. Some states require you to make a separate S corporation election for state income tax, but not Illinois.
Illinois S corporations still have a couple of other taxes to be aware of, though.
Personal property replacement tax, also known as replacement tax, is a tax on the net income of corporations, S corporations, partnerships, and trusts. It was created to compensate for the loss of power local governments had to levy personal property taxes on business.
As of 2022, S corporations pay a 1.5 percent replacement tax on their net Illinois income.
Pass-through entity (PTE) tax is an optional tax for S corporations and partnerships that allows them to make a federal deduction of state and local income taxes that are, as of the Tax Cuts and Jobs Act of 2017, limited to $10,000 annually. This $10,000 limit imposed by the Tax Cuts and Jobs Act is known as the “SALT (state and local taxes) Cap.” Illinois is one of several states that have recently enacted legislation related to this cap.
The PTE tax is effective for tax years ending on or after December 31, 2021, and beginning before January 1, 2026. A qualified Illinois tax professional can help you determine whether paying this optional tax and shifting these state and local deductions to the federal level is the best option for you.
Starting an S corp in Illinois can be complicated, but we’re here to make it as easy for you as possible.
If you want to form an LLC with S corp status, our S corp service can help you do just that. Plus, we offer other services to help you run and expand your business and stay in compliance with Illinois and federal laws. Click the button below to get started.
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For a corporation, one of the biggest advantages is being able to avoid double taxation. Typically, a C corporation’s profits are taxed at both the business and individual shareholder level, while an S corporation’s profits are taxed only on the individual level.
For an LLC, when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay employment taxes (Social Security and Medicare) on their salary and not the profits they receive. For some LLCs, this can add up to substantial tax savings.
The naming process for your Illinois corporation or LLC isn’t affected by your S corp status. Whether you file to be taxed as an S corp or not, your business remains an LLC or a corporation and follows the same Illinois business naming rules.
Before formally registering a business name, search the Illinois business entity records to make sure that you don’t select one that’s already in use by another business. That aside, however, you can typically name your Illinois S corporation nearly anything you want as long as you comply with any applicable state business naming regulations.
S corp status may not be right for all businesses. If you’re not sure whether to identify your LLC as an S corp or keep the default status, consult an experienced business law attorney or accountant in your state.
Calculating taxes can be confusing, but you can check out our S corp tax guide to learn more about navigating taxes for your Illinois S corporation. A certified tax professional can give you more definitive information for your circumstances.
Sorry, but our S corp service is only for applying for S corp status when you form your LLC with us. We do offer plenty of other services to support your established business, though.
According to the IRS website, you’ll be notified of whether or not your S corp election is accepted within 60 days of filing Form 2553.
If you’re a new LLC, you must apply for S corp status within 75 days of the formation of your LLC or no more than 75 days after the beginning of the tax year in which the election is to take effect. For an existing business, you would file at any time during the tax year preceding the tax year it is to take effect.
An LLC is a legal business entity, whereas an S corp is a tax election. You can read more on our LLC vs. S Corp page.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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