Entity Selection for New Businesses

Entity Selection

Business entities come in many forms, types and sizes. There are a number of factors that must be considered when deciding which entity to use for a new business. These factors include tax, legal, regulatory and operating considerations.

Most business owners choose between the following entity types:


If your business will have just one owner, you can operate as a sole proprietorship. By default, any business with one owner that is not a corporation, LLC or other statutory entity is a sole proprietorship. Sole proprietors have no legal liability protection and all income of the sole proprietorship will be reported on the owner’s personal income tax returns.


A corporation is a legal entity that has a separate legal existence from its owners.  The owners of a corporation are its shareholders.  The shareholders elect a board of directors that is responsible for the management and direction of the business of the corporation.  The board of directors elects officers of the corporation (president, vice-president, secretary, treasurer) that are responsible for carrying-out the directives of the board of directors and managing the day-to-day business of the corporation.  A corporation is required to follow more formalities than a LLC but it remains the preferred business entity type for businesses that primarily provide services and businesses that expect obtain capital investment from institutional investors.  A corporation can elect to be taxed as a C Corporation or an S Corporation.

S Corporation

The S corporation has a tax structure similar to an LLC, but the legal structure of a corporation. An S corporation is formed with the state the same manner as a C corporation, but there is an additional step. The shareholders must file an election with the IRS to be treated as an S Corporation for tax purposes. An S Corporation is not subject to double taxation; all income will be passed through to the shareholders. There are several restrictions on who can be a shareholder of an S corporation (as well as a limit on the total number of shareholders).

C Corporation

A C corporation is a separate taxable entity subject to federal and state income tax. A C corporation is subject to double taxation. A C corporation is required to pay tax on its profits and on dividends paid to its shareholders. However, C corporations can provide good tax planning opportunities and may also have more employee benefits options available than other types of business entities. C corporations are also the preferred type of entity if plan to solicit venture capital or plan on taking your company public.


A limited liability company (LLC) is a legal entity that is separate from the owner in the eyes of the law. A LLC provides a liability shield like a corporation, but with less formality.  A LLC with one owner (or member) is a single member LLC and a LLC with more than one member is a multi-member LLC.  Single Member LLCs and Multi-Member LLCs have the option to file an election to be taxed as an S-Corporation. 

Single Member Limited Liability Company 

A single-member LLC is a LLC with one member, or owner.  The single-member LLC is a great alternative to operating your business a sole proprietorship. Unlike a sole proprietorship, the assets and liabilities of a single member LLC are separate from the assets of its owner. A single member LLC is formed by filing articles of organization with the Secretary of State. To maintain legal liability protection, it is critical that single member LLC owners segregate business assets from their personal assets and observe company formalities.


Multi-Member LLC

A multi-member LLC has two or more owners, or “members." A multi-member LLC combines the tax advantages of a partnership with the legal liability protection of a corporation. A multi-member LLC provides the greatest amount of flexibility for customizing the structure of a business, and is particularly effective for real estate projects. Due to its flexibility, the LLC has become a popular choice in the past few years. If you are considering an LLC for your business, it is vital that you consult with your attorney to confirm that it would be an appropriate entity for your particular situation.


The choice of which business entity to use is one of the most important items to consider as you take the necessary steps to start your new business. Please contact Illinois business attorney Linnemeyer Law for more information on how he can help you with your legal needs.