Business Entities 101

There are several types of business organizations to consider. Each state has its own process for formation, depending upon which type of business organization that is selected. The following are types of business organizations in Illinois, although most states filings are similar, with the exception of the series LLC, which is only available in 15 states currently:

Sole Proprietorship:

  • No formal filing is required with the state; however, a business license and/or occupational license may be required.

  • One person owns the business, and he or she is personally responsible for liabilities.

  • There is no separation of the individual’s personal assets from those of the business and all are at risk of loss.

  • The profits and losses “pass through” to the individual, and the individual pays income tax on all profits of the business at the end of the year on their personal tax return.

General Partnership:

  • No formal filing is required with the state; however, a business license and/or occupational license may be required.

  • Two or more persons own the business, and absent an agreement to the contrary, each share equally in all profits and losses.

  • Each partner has the authority to bind the business.

  • Each partner’s personal assets are at risk of loss, as there is no separation of assets.

  • Each partner reports their percentage of profit or loss of the business activity on their personal tax returns.

Limited Partnership (LP):

  • A certificate is required to be filed with the state prior to formation.

  • Two or more persons own the business, at least one limited partner and one general partner.

  • The general partners are personally liable for all the debts and liabilities of the partnership; whereas, the limited partners are not personally liable.

  • A limited partner has no authority to act on behalf of the partnership.

  • A partnership agreement sets forth the share of profits and losses.

Limited Liability Partnership (LLP):

  • Same as LPs, except a partner may not be liable for the acts of another partner.


  • Articles of Incorporation are required to be filed with the Secretary of State in order to form the entity.

  • A corporation is a legal entity separate from its owners, who own shares of stock in the company. They are called the shareholders.

  • Corporations can be created for profit or nonprofit purposes.

  • A special structure called a Professional Corporation may be used when the corporation provides a certain professional service (i.e. law).

  • Profits are taxed both at the corporate level and again when distributed to shareholders. This is referred to as “double taxation.”

  • Shareholders are not personally liable for corporate obligations unless corporate formalities have not been observed; such formalities provide evidence that the corporation is a separate legal entity from its shareholders. Failure to do so may open the shareholders to liability of the corporation’s debts. Corporate formalities include:
    issuing stock certificates,
    holding annual meetings,
    recording the minutes of the meetings, and
    electing directors or ratifying the status of existing directors.

  • The shareholder’s interested are managed by an elected group, the Board of Directors. The Board of Directors is responsible for election of the officers that run the day-to-day business of the corporation.

  • The shareholders and/or Board of Directors may adopt Bylaws setting for the management and the affairs of the corporation.

  • Shareholders may adopt a Shareholder Agreement which sets the rules for how the shareholders interact.

Subchapter S Corporations:

  • Identical to the Corporation, except a tax election is made that enables the shareholder(s) to treat the profits as distributions and have them pass through to their personal tax return. This avoids “double taxation.”

  • A shareholder that works for the corporation must pay him/herself reasonable wages.

Limited Liability Company (LLC):

  • Articles of Organization are required to be filed with the Secretary of State in order to form the entity.

  • The LLC is generally considered advantageous for small businesses because it combines the limited personal liability feature of a corporation with the tax advantages of a partnership and sole proprietorship.

  • Profits and losses can be passed through the company to its members or the LLC can elect to be taxed like a corporation.

  • LLCs do not have stock and are not required to observe corporate formalities.

  • Owners are called members, and the LLC is managed by these members or by appointed managers.

Series LLC:

  • Illinois is one of the few states that recognize the Series LLC.

  • Identical to LLC, except that the debts, liabilities and obligations incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series thereof.

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