Introduction: Why Choosing the Right Business Entity Matters
Starting a new business is exciting, but it also comes with an overwhelming number of decisions. Among the very first choices that entrepreneurs in Illinois and Missouri must make is how to legally structure their company. The decision between forming a Limited Liability Company (LLC) or electing to operate as an S Corporation is one that will affect how you pay taxes, how you manage your operations, and even how much personal risk you carry as a business owner.
While both structures can provide liability protection and opportunities for growth, they differ in ways that may make one a better fit depending on your goals, income level, and long-term plans. Understanding these differences is essential before you file with the Secretary of State or make any tax elections. In this article, we’ll walk through the key features of LLCs and S Corporations, compare how each works in Illinois and Missouri, and provide guidance on which option might be best suited for your business.
Understanding the Basics
What Is an LLC?
A Limited Liability Company, or LLC, is one of the most popular business structures in the United States, particularly for small business owners and first-time entrepreneurs. The appeal of the LLC lies in its flexibility. It is designed to combine the limited liability protection of a corporation with the ease of management and pass-through taxation of a sole proprietorship or partnership.
When you create an LLC, you establish a separate legal entity that can own property, enter into contracts, and be held responsible for debts or lawsuits. This separation means that the owners—referred to as members—are not personally liable for the obligations of the business. If the company is sued or incurs debt, the personal assets of its members, such as homes and savings accounts, are generally protected.
Tax treatment is another defining feature of LLCs. By default, an LLC is taxed as a pass-through entity, which means profits and losses flow directly to the members’ personal tax returns. The company itself does not pay federal income tax. For small businesses that expect to operate with relatively modest profits or anticipate early-stage losses, this can be a significant benefit. If you want more detail about the legal requirements of forming an LLC, our Business Formation Services page breaks down the steps in Illinois and Missouri.
What Is an S Corporation?
An S Corporation is not technically a separate type of business entity—it is a tax designation available to certain corporations and LLCs that meet eligibility requirements. To become an S Corporation, a business must first be formed as a corporation or an LLC and then file IRS Form 2553 to elect S Corporation status.
The primary purpose of an S Corporation election is to allow profits, losses, deductions, and credits to pass directly to shareholders without being subject to double taxation. Unlike traditional C Corporations, which pay corporate tax and then face a second layer of taxation when distributing dividends, S Corporations avoid this extra burden.
Another feature of S Corporations is their ability to structure income in a way that can reduce self-employment taxes. Owners who work in the business are required to pay themselves a “reasonable salary,” which is subject to payroll taxes. However, any remaining profits can be distributed as dividends, which are not subject to self-employment taxes. For business owners earning higher income, this can result in meaningful tax savings.
Key Differences Between LLCs and S Corporations
Although LLCs and S Corporations share common ground in terms of liability protection and pass-through taxation, their differences become clear once you look closely at how they are formed, structured, and taxed.
In Illinois and Missouri, forming an LLC requires filing Articles of Organization with the Secretary of State. You can review requirements directly at the Illinois Secretary of State – Business Services and the Missouri Secretary of State – Business Services. The process is relatively straightforward, and ongoing compliance is minimal compared to corporations.
S Corporations, by contrast, require a bit more complexity. They begin as a corporation (or LLC) and then must formally elect S Corporation status with the IRS. In addition, corporations are subject to stricter governance rules, including the appointment of directors and officers and the holding of annual meetings.
From a taxation standpoint, the LLC offers simplicity: profits and losses are reported on the members’ personal tax returns. The S Corporation offers a more nuanced tax arrangement, which can be advantageous for certain income levels. However, this flexibility comes at the cost of additional compliance, payroll obligations, and stricter eligibility rules.
Advantages of an LLC for Small Businesses
For many entrepreneurs, especially those starting small or operating on a tight budget, the LLC represents the most practical choice. Its flexible management structure means that owners can run the company themselves or appoint managers to handle day-to-day operations. Unlike corporations, LLCs are not required to hold annual meetings, record minutes, or maintain a board of directors, which reduces administrative overhead.
Another advantage is the ease of compliance. Filing requirements in both Illinois and Missouri are straightforward. Once an LLC is established, the business generally only needs to file an annual or biennial report with the state and pay a modest fee. For small business owners who want to focus on growth rather than paperwork, this simplicity is invaluable.
LLCs also offer taxation benefits for startups and early-stage companies. Because losses can pass through to members, those losses may be used to offset other income on personal tax returns. This can be particularly useful in the first few years of operation when businesses often face higher expenses than revenues. For a broader discussion of compliance, you may also want to read our blog on the Corporate Transparency Act, which affects reporting obligations for LLCs and corporations alike.
Advantages of an S Corporation
The primary advantage of an S Corporation lies in its potential for tax savings. Owners who actively work in the business can pay themselves a reasonable salary and then receive the remainder of profits as distributions. This distinction reduces the portion of income subject to self-employment taxes, which can save thousands of dollars each year.
S Corporations may also carry an aura of credibility that can be attractive to lenders, investors, and potential partners. Operating as a corporation signals a level of formality and commitment that some outside stakeholders prefer. Additionally, shares of an S Corporation can be transferred more easily than membership interests in an LLC, which can simplify succession planning or bring in new investors.
Disadvantages to Consider
No entity structure is perfect, and each comes with drawbacks. For LLCs, the main disadvantage is the potential for higher self-employment taxes. Because all profits are generally subject to these taxes, business owners with significant earnings may find themselves paying more than they would under an S Corporation structure.
On the other hand, S Corporations come with stricter compliance requirements and limitations. Only U.S. citizens and certain types of trusts and estates can be shareholders, and the number of shareholders is capped at 100. Additionally, S Corporations must maintain formal records, hold annual meetings, and comply with payroll tax rules. For some small businesses, these requirements add a layer of complexity that outweighs the benefits.
How Illinois & Missouri Laws Impact Your Choice
Local state laws can also influence whether an LLC or an S Corporation is the better choice. In Illinois, the cost of forming an LLC is relatively high compared to Missouri, and annual reporting fees add to the ongoing expense. Missouri, by contrast, tends to have lower fees and more relaxed reporting requirements, which can make LLCs especially appealing for entrepreneurs starting out in that state.
For corporations, both Illinois and Missouri require more rigorous filings, including articles of incorporation, bylaws, and annual reports. However, Missouri’s biennial reporting requirement is slightly less burdensome than Illinois’ annual filings. These state-specific differences mean that cost and compliance can vary depending on where you choose to establish your business.
Which Structure Fits Your Business Best?
The right choice between an LLC and an S Corporation depends on your unique situation. If your business is just getting started, you value simplicity, and you anticipate modest profits in the early years, an LLC may provide all the protection and flexibility you need. On the other hand, if your company is generating significant income, you plan to hire employees, or you want to maximize tax savings, an S Corporation may be a more strategic option.
It’s also worth noting that these choices are not always permanent. Many business owners start as an LLC and later elect to be taxed as an S Corporation once profits grow. This hybrid approach allows entrepreneurs to take advantage of LLC simplicity in the early years and shift to S Corporation benefits later.
FAQs About LLCs and S Corporations
1. Can an LLC elect to be taxed as an S Corporation?
Yes. An LLC can file IRS Form 2553 to be taxed as an S Corporation, giving owners the flexibility to combine the advantages of both structures.
2. Which is cheaper to form in Illinois or Missouri?
Missouri generally has lower formation and ongoing compliance fees than Illinois, making it the more cost-effective state for many small business owners.
3. Do both LLCs and S Corporations provide liability protection?
Yes. Both structures shield owners’ personal assets from business debts and liabilities.
4. Can a single-owner business form an S Corporation?
Absolutely. A single-member LLC or a sole shareholder corporation can elect S Corporation status.
5. Which option offers better tax savings?
S Corporations may offer greater tax savings for businesses with higher profits because of the ability to split income between salary and dividends. However, the savings depend heavily on income levels and how the business is structured.
6. Do I need a lawyer to form an LLC or S Corporation?
While you can file formation documents on your own, working with an attorney ensures compliance with state-specific requirements and helps you select the entity that aligns with your long-term goals.
Conclusion: Making the Right Choice With Legal Guidance
Choosing between an LLC and an S Corporation is not a decision to take lightly. Both offer significant protections and advantages, but the nuances in taxation, compliance, and state-specific requirements can make one option better than the other for your situation.
At Steinmetz Law Ltd., we guide Illinois and Missouri entrepreneurs through the formation process, ensuring that their businesses are built on a solid legal foundation. Whether you’re launching your first startup or restructuring an existing company, we can help you evaluate your options and make a decision with confidence.
👉 Contact A.H.Steinmetz, Ltd. today to schedule a consultation and start your business the right way.
