Illinois S Corporation
Advantages Disadvantages

Illinois S Corporation Advantages Disadvantages

Illinois Corporate Income Tax

Illinois S Corporation Advantages Disadvantages - Currently, Illinois’ corporate income tax ranks 23rd in the corporate income tax subindex. HB 750, the proposals in front of the law makers now, would raise corporate tax rates and expand the base by eliminating corporate tax “loopholes.” This causes Illinois’ ranking on corporate taxes to fall drastically to 47th.

Illinois S Corporation:

S Corporation Definition-A corporation with 75 or fewer shareholders,that has elected and qualified for a special tax status with the Internal Revenue Service (IRS).

The main advantage associated with the S Corporation is that the income passes through to the shareholders, therefore avoiding a perceived double taxation of a C-Corporation.

Should I form a Illinois S Corporation?

An "S Corporation" is a corporation that elects to be taxed under Subchapter S of the Internal Revenue Code (enacted in 1958 and periodically amended) and receives IRS approval of its request for Subchapter S status. As a legal entity (an artificial person), the S Corporation is separate and distinct from the corporation's owners (the stockholders).

Illinois S Corporation Advantages and Disadvantages

Advantages of the S Corporation:

  • The independent life of the corporation makes possible its continuation, and the relatively undisturbed continued operation of the business regardless of incapacity or death of one or more stockholders.

  • Fractional ownership shares are easily accommodated in the initial offering of stock.

  • The purchase, sale, and gifting of stock make it possible to have changes in ownership without disturbing the corporation's ability to conduct business.

  • The requirement that the corporation's finances and records be separate from the finances and records of stockholders reduces the risk of unrecognized equity liquidations.

  • With only a few exceptions, under the Subchapter S election for taxation as a partnership the S corporation pays no income taxes and corporation income or loss is passed through direct to the stockholders.

  • To the extent the corporate shield is maintained and other investments and savings of the stockholders are not at risk, the personal life of stockholders is simplified.

  • The annual meetings of stockholders and consultations with legal counsel can provide stimulus for improved communication within the stockholder group (often a family group) and can provide more comprehensive guidance for management.

  • Depending on the corporation's business record and the policies and practices of prospective lenders, access to credit and the ability to secure needed resources may be improved.

  • Earnings representing "return on investment" (interest, rental payments, etc.) are not subject to self-employment tax as long as stockholder-employees receive adequate compensation for labor and management of the business.

Disadvantages of the S Corporation:

  • Lenders may require personal guarantees from corporate officers as a condition of supplying credit, thus negating the limitation of liability.

  • Conflicts or disagreements among the stockholders may immobilize decision making.

  • Restrictions on the sale of stock and/or buy-back agreements included in the bylaws may prevent minority stockholders from being able to recover the value of their investment in the corporation.

  • Through the processes of gifting and inheritance, stock ownership can become divided among many persons who are not active in the business and they may become a voting block that does not support needs and decisions believed desirable by managing stockholders.

  • Over time, corporation paid benefits for stockholder-employees may become costly and exceed the ability of the business to pay.

  • Employment benefits such as life insurance, health insurance, and housing costs are taxable income to stockholder employees with 2 percent or more stock ownership and to employees who are directly related to persons owning 2 percent or more of the corporation stock.

  • If appreciated assets are owned by the corporation and the corporation is dissolved, significant income taxes on the appreciation amount will be generated.

Illinois' Corporate Income Tax

Illinois' corporate tax consists of a flat rate of 9.5% on all corporate income . Among states levying corporate income taxes, Illinois' rate ranks among the highest. In 2008, state-level corporate tax collections were $243 per capita, which ranks 10th highest nationally.

Illinois' Individual Income Tax System

Illinois' personal income tax system consists of a flat five percent rate on federal adjusted gross income. That rate is among the lowest among states that levy individual income taxes. Illinois' 2008 state-level individual income tax collections were $806 per person, which ranked 31st highest nationally.

Illinois' Business Tax Climate Ranks 23rd - 2011

Illinois ranks 23rd in the Tax Foundation's State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property.

Illinois' State and Local Tax Above National Average

Illinois' 2009 state and local tax burden of 10.0% of income is above the national average of 9.8%. Illinois' tax burden has decreased overall from 10.4% (16th nationally) in 1977 to 10.0% (13th nationally) in 2009.

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