At times it seems that I have the same conversations over and over again. This occurs when I am meeting with someone who wants to start a business and they already have a preconceived business entity in mind.
For those who have been around the block a few times this works. But for a neophyte this is no always a good idea.
For those who are attempting a side business and they are not sure if this is the way to go, I suggest no corporate entity and just record the business on a Schedule C as a sole proprietor and have the profit flow onto the 1040. Now if there is profit, there is the chance of self-employment taxes. But the costs here are probably less than the incorporation process; especially for a part-time start-up. Depending on the business, I encourage professional liability insurance to cover any errors.
I hate the idea of partnerships since there in unlimited liability and you can be personally responsible for whatever stupid moves your partner does in the name of the partnership.
An LLC is costly to set-up in Illinois. A sole member LLC is a disregarded entity in the eyes of the IRS and any and all profits from any LLC are subject to self-employment income. But your liability is limited to the money you put into the organization so long as the corporate veil has not been pierced. You should also have corporate books and records which include your operating agreement.
A C-Corporation is typically for those entities that are looking to get large and typically large fast. Liability is limited to what you invest. But the profit is taxed at the corporate level and then the only way you can get money out is salary or dividends. The double taxation piece is usually the breaker for the C-Corp. Again the corporate books and records need to be maintained.
Then there is the S-Corp. At present this is typically the best option for small business owners. Your liability is limited, but do not pierce the corporate veil. Also you should be maintaining your corporate books and records. But the profit flows onto your 1040 subject only to income tax not self-employment tax as well. But you should be paying yourself a reasonable salary. I like this entity because you are rewarded with the profits only being subject to income taxes for the risk that you took for starting your own business.
So unless the new entrepreneur has a strong handle on the direction they want to go, the entity they have chosen may not be the best for them.
We can help a future business owner decide what will work best for them.