Have you thought of starting a home based business, as a side-hustle or maybe even full-time? Maybe you have a great product idea that you could sell from your home, or a service you can offer. Are you concerned with the potential liability? Limiting liability through business insurance is an option that should be explored, but this article focuses on entity selection.
By failing to form a separate business entity, you are by default operating as a sole-proprietor (individual) or partnership (more than one individual). Depending on the business, it may be a wise choice to form a separate entity for your home based business (such as selling homemade foods).
Sole-proprietor:
Operating as an individual with no separate legal entity. It is the default classification if you operate as an individual. A sole-proprietorship is simple to maintain, but offers no liability protection for the owner.
Partnership:
Illinois recognizes several distinct partnerships, but generally a partnership is “the association of two or more persons to carry on as co-owners a business for profit…whether or not the persons intend to form a partnership.” Similar to a sole-proprietor, a partnership may be formed without the partners’ specific intent to form a legal partnership and without any specific filing by the partnership. That means, if you meet the statutory definition of a partnership, you are a partnership. Partners generally remain personally liable for the debts of the partnership, but are taxed as individuals.
Limited Liability Partnership:
A Limited Liability Partnership (“LLP”) is a recognized form of partnership covered by statute An LLP requires a filing of a statement of qualification with the Illinois Secretary of State. LLPs, unlike general partnerships, limit the personal liability of partners for the partnership’s obligations. (805 ILCS 206)
Corporation:
A separate legal entity, defined by statute, and permits different classes of stock and shareholders, and provides liability protection of shareholders. However, requires more detailed filing requirements. To form a Corporation in Illinois you must comply with the Illinois Business Corporation Act of 1983 (805 ILCS 5). The Act requires keeping of corporate records, minutes of proceedings, and other requirements. For tax treatment purposes, a corporation can elect to be treated as a C Corporation, or as an S Corporation. A Corporation is subject to double taxation (tax of both the corporate entity and distributions to shareholders).
An S Corporation is organized like a corporation and provides liability protection to its shareholders. S-Corporations are treated as a pass-through entities for tax purposes. S Corporations are restricted as to the number of shareholders (no more than 100), only one class of stock is permitted, and there are limits on the type of shareholders (must be individuals, with some exceptions).
Limited Liability Company (LLC):
LLCs are governed by the Illinois Limited Liability Company Act (805 ILCS 180). It is a separate legal entity, and the filing requirements are less complex than Corporations. The current fee for filing Articles of Organization is $150, and the filing of an annual report is $75, which is a one-page form. The simplicity of an LLC makes it an attractive option for many small-business start-ups.
Corporations and LLCs need to list a registered agent with a physical address (cannot be a P.O. Box) in Illinois. The registered agent may be served summons, notice and demands made on the entity.
Many home based businesses may choose to operate as an LLC, which permits limited liability protection of the members, and pass through taxation. Since the filing requirements in Illinois are less complex, and recently reduced filing fees, this is an attractive option. However, each situation is unique and discussing your options with a business lawyer, may provide additional insight.
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