When starting a business, choosing the right type of legal entity is a key decision. Each business structure has unique features, affecting everything from taxes to liability and management responsibilities. In Illinois, the main types of business entities include C-Corporations, S-Corporations, Limited Liability Companies (LLCs), Limited Partnerships (LPs), General Partnerships (GPs), and Limited Liability Partnerships (LLPs). Understanding the basics of each can help business owners decide which structure best fits their goals and needs.

C-Corporation

A C-Corporation is a separate legal entity that offers limited liability to its shareholders, meaning they’re not personally responsible for business debts. It is managed by directors and officers and has perpetual existence. Taxes are applied at both corporate and shareholder levels, known as “double taxation.” While it has strong liability protection, C-Corporations must maintain corporate formalities, such as holding annual meetings. Shareholders can freely buy and sell their shares.

S-Corporation

Similar to a C-Corporation, an S-Corporation provides limited liability but is taxed differently. It allows income to “pass through” to shareholders, who report it on personal tax returns, avoiding double taxation. However, S-Corporations have restrictions, including a limit of 100 shareholders and all must be U.S. residents. They also need to follow corporate formalities, like holding regular meetings.

Limited Liability Company (LLC) 

An LLC combines benefits of corporations and partnerships, offering limited liability to its members. It can choose how to be taxed and has fewer formal requirements. LLCs can be managed by members or appointed managers. This entity type offers flexible management but may have higher annual fees. It also provides strong protection from personal liability for its members. For these reasons, it is the most common type of business entity for a small business.

General Partnership (GP) 

A GP is easy and affordable to form, with profits and responsibilities shared among partners. In a General Partnership, all partners manage the business and all partners have full liability, meaning personal assets may be at risk for business debt. This structure is easy and inexpensive to set up but can be risky, as each partner is liable for business debts. It may have a limited lifespan because the partnership dissolves upon a partner’s death or withdrawal. GPs are best suited for businesses where partners share both roles and risks.

Limited Partnership (LP) 

A Limited Partnership has general and limited partners; general partners manage the business and have full liability, while limited partners have liability only up to their investment and don’t participate in management. This structure is simpler than a general partnership, allowing general partners to make business decisions without needing input from limited partners.

Limited Liability Partnership (LLP) 

A LLP is similar to a general partnership but provides limited liability to partners, protecting them from personal liability for business debts. It has fewer formal requirements and annual filing fees are high. It’s often used by professional groups like law firms to offer liability protection while allowing partners to participate in management.

These entity types each offer unique benefits and risks, making it essential to choose one that aligns with business goals and liability preferences. It’s always helpful to talk to an expert to decide what’s right for you.