The Tax Advantages of an S Corp Vs. a Sole Proprietorship in Illinois

By Heather Frances J.D.

Although Illinois allows you to change you business structures, changing can be difficult and expensive, so it’s best to know what you're getting into, so you can pick the right structure from the start. Sole proprietorships and S corporations each offer tax advantages that may benefit you depending on your situation and goals, but taxes should be only one of many considerations when you decide on a structure.

Although Illinois allows you to change you business structures, changing can be difficult and expensive, so it’s best to know what you're getting into, so you can pick the right structure from the start. Sole proprietorships and S corporations each offer tax advantages that may benefit you depending on your situation and goals, but taxes should be only one of many considerations when you decide on a structure.

Forming a Business

Sole proprietorships are generally the simplest and least expensive type of business to form. Sole proprietorships are legally indistinguishable from their owners, meaning the owners are responsible for the debts and liabilities of the business. If you operate your sole proprietorship in your own name, you do not have to register your business with the state of Illinois, though you may have to obtain sales tax licenses, permits or professional licenses depending on the category of business you operate. If you operate your business under another name, you must register your business name with your local county clerk’s office. S corporations are a specialized type of corporation, so they must file articles of incorporation with the state and pay filing fees like corporations. Once your corporation is formed with the state, you must file an S corporation election with the Internal Revenue Service by filing Form 2553. As long as your corporation qualifies for this election, your corporate profits will "pass through" to shareholders, who will pay taxes through their personal income tax returns. They are not taxed at the corporate level.

Ready to incorporate your business? Get Started Now

Federal Taxation for Sole Proprietorships

Sole proprietorship earnings are subject to self-employment taxes when you file your personal income taxes -- that is, you pay both the employer's and the employee's portion of Social Security and Medicare on your earnings. You may have to make quarterly estimated tax payments with the IRS to avoid penalties at the end of the tax year. Sole proprietors typically file Schedule C and Schedule SE along with their individual income tax forms.

Federal Taxation for S Corporations

S corporations offer several tax benefits when compared with sole proprietorships. For example, only salaries -- not profits -- are subject to payroll taxes. However, as the owner and operator of an S corporation, you must take a “reasonable” salary for taxation purposes. You cannot try to avoid payroll taxes by taking compensation in the form of profits instead of a salary. Frequently, a business that is a start-up or a side business making little profit benefits from a sole proprietorship structure, while more profitable businesses benefit by becoming S corporations.

State Taxes

Illinois also taxes corporations and sole proprietorships differently at the state level. As is the case with federal taxation, sole proprietors pay state income tax with their own personal tax returns. Sole proprietors do not have to pay Illinois Personal Property Replacement Tax or franchise taxes. S corporations do not have to pay corporate taxes, but profits "pass through" directly to shareholders, who pay taxes via their personal income tax returns. S corporations also pay Personal Property Replacement Tax and franchise taxes, though the personal property tax rate is lower for S corporations than C corporations.

Ready to incorporate your business? Get Started Now
How Much Should I Pay Myself From My Corporation?

References

Related articles

What Is the Most Important Benefit of Sole Proprietorships?

The most common small business entity is a sole proprietorship because it is extremely easy and inexpensive to create. A sole proprietorship essentially occurs when you go into business for yourself. While a major drawback to owning a sole proprietorship is the fact that the owner has unlimited personal liability, there are many benefits. Depending on your business and personal preferences, being a sole proprietor may be your best option as the ease with which you can create and manage a sole proprietorship is an extremely important benefit.

A Professional Corporation vs. an LLC

Starting a new business is a big undertaking that requires making many decisions. Once you have developed a vision for the business, you must decide how to structure it. Each state has laws that govern the basic structure and specific rules for each type of business entity permitted in that state. Two examples of common business forms in all states are professional corporations and limited liability companies. PCs and LLCs are popular choices for small businesses. You must determine which business form will best suit your company's needs.

Definition of Incorporated Business

In launching a new business, one of the most important decisions you must make is the legal structure your new company will take. Each structure has its advantages and drawbacks. However, companies that operate on the global market share a common legal structure -- they are incorporated. Consult with an attorney who specializes in business law with specific questions about forming a company.

LLCs, Corporations, Patents, Attorney Help

Related articles

What Kinds of Forms Are Needed to Elect an S-Corp in Illinois?

To elect S-corp treatment of your Illinois corporation or limited liability company, the federal government – not ...

Definition of a C-Corporation

Classification of a corporate entity as a C corporation rests entirely on whether it’s subject to the income tax ...

Taxes on Corporations Compared to Partnerships

Corporations and partnerships are both business entities, or ways of organizing a business structure. A corporation is ...

Tax Advantage of LLC Over S Corp

When researching the best legal structure for your small business, you may consider a limited liability company, or ...

Browse by category