Taxation for LLCs in Illinois. What you should know

Taxation for LLCs in Illinois. What you should know

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LLCs are more attractive to business owners than sole proprietorships and partnerships because of their limited liability, which is able to protect your personal assets. When taxing an LLC, there are also benefits – the owner or members of an LLC can choose how they would like to be taxed – as a sole proprietorship, partnership or a corporation.

What’s the best way to be taxed in Illinois – a sole proprietorship, partnership or corporation?

A business will typically select the business type that has the lowest tax rate overall, if you’re eligible for it. Here’s a breakdown of each type of possibility:

Partnership: to be classified as this an LLC must have at least two members. Partnerships have flow-through taxation, meaning deductions and benefits are passed through from the LLC to the members instead. As well as this, federal tax income will only be on the company.

Sole proprietor: to be classified as this there should be only one owner. This also has the advantage of flow-through taxation. As the owner, you will report all profits and losses on your Schedule C – this is submitted with your personal tax return. 

Corporation: corporations are well-known for their double taxation feature – which means paying taxes on the income of the corporation as well as the income received as dividends. Though sometimes people choose to pay taxes as a corporation because it could mean lower tax rates, and there are ways to get around some parts of the double taxation.

What are some of the most important ongoing tax filing requirements for LLCs?

State Business Taxes

Most LLCs choose to be taxed as sole proprietorships or partnerships, so they are eligible for pass-through taxation. This means the responsibility for paying federal income taxes passes through the LLC to the individual LLC members instead. So LLCs themselves don’t pay these taxes – only the members of the LLC do.

One difference that comes from having an LLC in Illinois, though, is that they impose a separate state tax directly on LLCs – called a personal property replacement tax. For most LLCs – that is LLCs that don’t elect to be taxed as a corporation – the tax is 1.5% of their net income.

For businesses in Illinois that choose to have their business taxed like a corporation, they are taxed on corporation income like every other state. In Illinois, the corporation income tax rate is about 5.25% of federal taxable income, with adjustments. Illinois also charges corporations the personal property replacement tax, at a higher rate: 2.5% of net income.

State employer taxes

If your LLC has employees, you’ll also need to pay employer taxes. Some of the taxes are payed to the federal government, the IRS, which start when you obtain an EIN. However, in Illinoise employers must also pay taxes to the state.

In addition, you may need to register to pay state unemployment taxes too.

Sales taxes

If your LLC sells goods in Illinois, you will need to pay sales tax. This means registering with the Illinois Department of Revenue, and then making periodic sales tax payments for any goods sold. As well as this, you must submit sales tax returns to IDOR (Illinois Department of Revenue).

Registration in other states

If you’ll be doing business in states other than Illinois, you’ll also need to register your LLC in those states as well – sometimes as a foreigner, depending on the state you’re registering in. Whether the state sees you as a business can depend on what they consider a business: sometimes it’s having a physical presence, while other times you’re just soliciting business in a state. Other states will have taxes too.

TRUiC has lots of informative tips on LLCs in Illinois. Read more on their website.

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