Pros and Cons of LLCs for Illinois Businesses
If you’re starting, or even running a small business in Illinois, having the right legal structure is important. A Limited Liability Company (LLC) is a popular option. This short article highlights some of the good and bad sides of the LLC for these businesses:
1. Trucking Companies
2. Family-Owned Restaurants
3. Home Remodeling, Roofing, and Landscaping Services
4. Home Health Care Companies
5. Rental Real Estate
Depending on your industry, an LLC might make sense. Let’s break down the most commonly known pros and cons.
The Good, the Bad, the Ugly
LLCs Illinois Business, IRS Tax Attorney (Naperville IL)
1. Trucking Companies
Best Features:
- An LLC protects your personal assets if your trucking business is sued. (Think about what the insurance doesn’t cover, especially when your new driver causes an accident.)
- It’s easier to manage than a corporation, with fewer paperwork requirements.
- You can choose how you’re taxed—either as a sole proprietorship, partnership, or corporation. But watch this must-see video!
Biggest Downsides:
- The Illinois Secretary of State requires annual fees and fees to make changes for LLCs. However, it is only $75 for the annual report fee, so maybe this is also positive.
- Some states require extra registration for trucking company LLCs, which adds costs.
- Most small trucking company owners never bother to create an LLC operating agreement, which prevents the LLC’s full legal protection from happening.
- Sometimes neither the LLC or some liability insurance policies will financially protect you against driver negligence. (So, hire your drivers wisely.)
2. Family-Owned Restaurants
Best Features:
- An LLC helps separate your restaurant’s debts and lawsuits from your personal home and other assets. (Think about what dangers could occur on those freshly-mopped floors.)
- It offers flexibility in ownership, making it easy for family members to be part of the business. It also offers better ownership control in cases of divorces and ending relationships.
- Some think there are fewer record-keeping requirements than a corporation. But for simpler companies, there is not much difference.
Biggest Downsides:
- You still need business licenses, health permits, and insurance, which can be costly.
- The LLC does not protect you from having personal responsibility for unpaid sales taxes and payroll taxes.
- Some business owners think an LLC allows them to hide cash, and pay workers “under the table”. The LLC does not give that benefit. (Learn the risks in this 2-minute video.)
- Illinois LLC fees add up over time, which is different than with sole proprietorship. However, the CPA might charge less for the annual tax returns than for a corporate tax return. (But know the tax risks involved in deciding which tax return to file.)
- If an LLC’s member leaves or passes away, it can complicate ownership. The operating (or membership) agreement should address and plan for events like changes of control, changes of ownership, or death.
3. Home Remodeling, Roofing, and Landscaping Services
Best Features:
- An LLC protects you if a client sues over property damage or injuries. Still, you should be insured for maximum protection.
- It allows you to hire employees without risking personal liability for their work. Note: If you don’t properly report and pay over their payroll taxes, you could be personally liable. (If you already owe, see this video.)
- You don’t have to follow strict corporate rules and meetings. The Operating Agreement can automatically manage some of those requirements.
Biggest Downsides:
- Many clients may still request contractor insurance, even with an LLC.
- Self-employment taxes can be higher if you don’t structure your LLC compensation with the advantage of avoided taxes.
- Because these services often only have a “home office”, it is difficult to keep personal transactions and records separated from the business. However, if you don’t separate personal and business finances, you can lose your liability protection.
- Many roofing companies, landscapers, and small construction workers prefer to be paid in cash. In those cases, tax-wise, the owner might just have to pay extra income taxes (for the workers’ pay).
4. Home Health Care Companies
Best Features:
- It’s easier to bring partners or investors into an LLC, compared to a sole proprietorship.
- An LLC limits personal liability in case of malpractice or business lawsuits. However, you must be reasonably insured.
Biggest Downsides:
- Home healthcare companies often struggle with payroll taxes. The LLC does not protect the owner against personal liability for certain unpaid payroll taxes.
- If not managed well, an LLC may not fully protect against lawsuits related to medical services.
5. Rental Real Estate
Best Features:
- An LLC protects personal assets from business debts and lawsuits, whether from renters, occupants, or visitors.
- The LLC can allow a bunch of protection for individual properties when each is owned within a separate LLC.
Biggest Downsides:
- It is often difficult to title property within LLC when mortgage financing is involved.
- Tax reporting is challenged when the interest statements reflect the primary buyer to be the individual owner and not the LLC.
- If the owner is a co-guarantor on a mortgage loan, the LLC does not protect the owner in case of loan default. Also, the owner’s other assets could be exposed to risk if they serve as additional loan collateral.
Final Thoughts
There are two additional items that you must think about:
The real power of LLC’s legal protection is contained within the Operating (Membership) Agreement. This document helps to direct what happens in cases of claims by third parties. Most new LLC owners forget this step to create a valid, effective, and enforceable Operating Agreement.
An LLC can be a great choice for Illinois small businesses, but it’s not perfect for everyone. Many businesses that have minimal risks, either for damages to others, or simply for unpaid liabilities, may not need the protection of an LLC.The biggest benefits are liability protection and tax flexibility, while the biggest downsides are fees and legal requirements.
Before you decide, consider your industry’s risks, costs, and legal needs. If you’re unsure, talking with a tax professional can help you make the best choice for your business.