LLC Formation: Why?
Every business owner’s worst nightmare: your future business gets sued for using an image on your website that you had no idea was owned by a large corporation. After a stressful and expensive court battle, the corporation wins a huge judgment against your business. You don’t have enough business assets to cover the amount of the judgment. Sadly, your business is out of money. Can the corporation take your personal assets too?
If you haven’t formed a business entity that limits your liability, then, yes, your personal assets could be at risk.
If you’re striking out as a business owner, freelancer, 1099 contractor (yes, 1099 contractors are business owners!), or startup founder, you have a lot of decisions to make about your business. One of the first questions should be:
What entity type is best for my business?
You can protect your personal assets by forming an entity that limits your liability.
Limited liability means there is a separation between the business’s assets and the owners’ personal assets, shielding personal assets from the business risks. C-Corporations, S-Corporations, and LLCs all provide limited liability protection.
Ready to talk to an attorney about protecting your personal assets and forming an LLC?
What Does LLC Formation Do?
A Limited Liability Company (LLC) is often the best entity choice for our clients.
Limits Your Liability
Protect your personal assets.
Multiple options for taxes, distributing profit and loss, etc.
Fewer formal and legal requirements
Gets It In Writing
An LLC’s Operating Agreement ensures that all the owners are on the same page.
Our attorneys make LLC formation a quick and seamless process. And it feels so good to finally make your business dreams and plans official.
Want to learn more about the benefits of forming an LLC? Schedule a consultation with one of our business formation attorneys.
“G & G has been the perfect choice for helping me start my LLC and guiding me through the start up process. They are very responsive, professional and friendly, and are affordable for a small business. I look forward to their support in running and growing my business. I strongly recommend G & G for anyone looking for the legal guidance to start their business the right way.”
“I had such a positive experience working with G&G! Working with Michelle, Katie, and Ian made the process of establishing my LLC remarkably stress-free and smooth. Their legal advice helped me feel protected and they were incredibly responsive, reassuring, and available throughout the process. I cannot recommend them highly enough!”
“We are a body waxing business owned by three women. We can not be more pleased with G&G Law’s services. They are very professional, responsive and committed to making sure that we succeed. We highly recommended G&G Law and we look forward to using their services for all of our future endeavors.”
LLC, C-Corp, or S-Corp?
Sometimes the hardest part of entity formation is learning your options and deciding between them! There are a lot of varying opinions out there – we can help you break it down.
The worst option is to do nothing and operate as a sole proprietor (if there’s only one owner) or a partnership (if there are multiple owners) by default. This leaves you vulnerable to personal liability. You can schedule a consultation with one of our attorneys if you’re struggling to choose the right entity to limit your liability.
The most common entity choices are:
- C-Corporations (C-Corps)
- S-Corporations (S-Corps)
- Limited Liability Companies (LLCs)
Which Entity Type is Right For Me?
C-Corps are the traditional entity type and tend to be the default for “old school” businesspeople. However, there are a couple reasons they may be less than ideal for small and mid-sized businesses.
- CON: Double taxation. Double taxation means that C-Corps are taxed at the corporate level and the shareholders, who are the owners or partners in a C-Corp, are ALSO taxed on the money they make from the C-Corp. You should consult with an accountant to determine if this is a concern for you.
- CON: Formal requirements. C-Corps have many formal requirements to maintain C-Corp status. For example, they need to hold an annual meeting each year and keep organized meeting minutes. They must name officers and appoint a board of directors.
- PRO: Venture funding preference. Venture capital firms seem to prefer that businesses they invest in be structured as C-Corps, although it’s likely not the ideal choice for the founders. If your business will not survive without venture funding, you should probably consider C-Corp formation. However, this is something that may be changing as LLCs become more accepted.
A C-Corporation is formed by filing Articles of Incorporation with the Secretary of State. The owners of a C-Corporation are called “shareholders.” You should keep signed Bylaws and a Shareholders Agreement explaining how the business is run at a high level at the principal place of business, along with procedural voting documents and written minutes.
Many of our clients prefer LLCs (or PLLCs, for licensed professionals). They are simple, flexible, and easy to manage. This makes them ideal for small business owners, who have enough on their plates already! Here are some of the reasons we like ‘em.
- PRO: Avoid double taxation. “LLC” actually isn’t an IRS tax classification! The default taxation of LLCs “pass-through”. This means the LLC is a disregarded entity and taxed as a sole proprietorship (if there’s one owner) or a partnership (if there are multiple owners). However, LLCs can elect to be taxed as an S-Corp or C-Corp – which leads us to our next pro.
- PRO: Flexible. LLCs have flexibility in how they are taxed. They also are flexible in how profits and losses can be distributed – it doesn’t have to be in proportion to ownership amounts.
- PRO: Easy. LLCs have fewer legal formalities. You don’t have to have annual meetings, keep minutes, or appoint a board of directors. You certainly can if you want to, though.
- CON: Of course, an LLC may not be the right fit if your situation is highly complex (venture funding, international issues, complex taxes, etc.). And your retired accountant uncle may give you the side-eye, because, you know, “back in his day….”
LLCs are formed by filing Articles of Organization with the Secretary of State. The owners of an LLC are called “members”. You should keep a signed Operating Agreement explaining how the business is run at a high level at the principal place of business.
As you can see in the graphic below, S-Corporations actually don’t belong in the list of entity types! They are NOT a legal entity type formed with the Secretary of State. S-Corps are an IRS tax classification. Either C-Corps or LLCs can elect to be taxed as an S-Corp by sending Form 2553 to the IRS. There may be tax benefits– we recommend consulting with your accountant or CPA.
Illinois LLC Formation: The Process
An LLC is formed by filing Articles of Organization with the Secretary of State. The owners of an LLC are called “members”. You should keep a signed Operating Agreement explaining how the business is run at a high level at the principal place of business.
- Articles of Organization: File Articles of Organization with the Illinois Secretary of State. This is a relatively simple 2-page form that can be filed online or mailed in. The form asks for your business name, principal place of business, registered agent, purpose, and whether the business will be member-managed or manger-managed. The Secretary of State filing fee is $150 (plus credit card processing fees). You can pay an extra $100 for 24-hour expedited filing. If you don’t choose expedited filing, it usually takes about two weeks for the Secretary of State to process your LLC formation.
- Operating Agreement. An Operating Agreement is the agreement the members (owners) of the LLC enter into defining and describing their relationship and how to run the business at a high level. You may hear it colloquially referred to as a “partnership agreement”. It’s important that the agreement is carefully drafted to accurately describe the relationship between the members. It can include voting rights (what’s decided unanimously or by majority vote – or another percentage?), amount of capital contributions, non-compete provisions, procedures for bringing on another member or investor, how to wind-down the business, and what happens in case of death, disability, or a member leaving. While an Operating Agreement is not statutorily required, a bank or future investor will want to ensure that it’s in place. You should keep the Operating Agreement at your principal place of business. It’s very important that all the members of the LLC understand the Operating Agreement provisions and follow the processes laid out to run the business correctly.
Still have questions? Read on for how G & G Law’s attorneys can get your LLC going quickly and painlessly.
How G & G Law, LLC® Can Help
As a business owner, you have a lot to do, a lot to learn, and a lot to worry about! We can make the LLC process easy and stress-free, so you can focus on what you do best.
This helps us gain a deep understanding of you and your business – we discuss your background, timeline, plan, ideas, goals, and concerns. Then we work with you to prioritize next steps and develop a plan of action to protect you and your business.
The engagement letter lays out the scope of our representation, the services your attorney will provide. Once you send us the signed engagement letter and payment, your attorney can get started!
For LLC formation, you’ll complete a questionnaire to collect the information we need for your Articles of Organization and Operating Agreement. You and your attorney will have a phone call to make sure you understand what information we need, discuss your responses, and answer all your questions.
4) Articles of Organization
We’ll complete your Articles of Organization based on your questionnaire responses and our discussion and file them with the Secretary of State. The Secretary of State should approve your LLC within two weeks, or 24 hours if you spring for expedited processing.
5) Operating Agreement
Your attorney will draft your Operating Agreement based on your questionnaire responses. This is a back and forth process, ensuring you completely understand the provisions of your Operating Agreement and that it reflects what you want for your business, every step of the way.
6) Next Steps Letter
After the Articles of Organization has been approved, we will send you a document detailing next steps to take and how to maintain your LLC.
- +Secretary of State fees
- +Secretary of State fees