Both companies and individuals in Illinois are often given the advice to create a limited liability company (LLC) in order to conduct their business in the state. The creation of an LLC can bring with it many benefits, some of which are related to taxation. However, there is still confusion among many Illinois residents and entrepreneurs over the tax obligations of an LLC to the state.
So, the question is: Do LLCs pay taxes in Illinois? The answer’s a bit more complex than you might think, so we break it down for you below.
Let’s start with the basics of why it might be advantageous to establish an LLC in the first place. Many business owners, especially small businesses, find that operating under an LLC gives them more tax advantages than filing strictly as individuals, even though they’ll still end up personally filing their business taxes (we’ll address this later).
LLCs protect members in several ways. Being a limited liability company means that the business owners have no personal liability for things such as debts resulting from lawsuits or the business itself. Owners also have a considerable amount of asset protection. Though a corporation can achieve some of the same protections, many people opt for LLCs as they require fewer formalities.
An LLC is also relatively easy and affordable to set up. If you wish to set up an LLC in Illinois, you’ll pay an initial filing fee of $150, followed by an annual fee of $75, which is extremely doable for most businesses.
Finally, an LLC can be comprised of as many members as you wish without affecting its taxation status. Business owners who opt for a corporate structure will find that there are limitations to how many members they can include. An S-Corp structure caps out at 100 members. A C-corp structure is technically allowed to have more members, however, if the number of members surpasses a total of 100, the entity will then be liable for double taxation and a higher level of scrutiny and regulation in its day to day business.
No matter what profit you have or haven’t made, Illinois requires you to a file an LLC report annually, which can either be done online or with Form LLC-50.1. The fee for filing is $75, and there are penalties for filing late.
The date of filing will differ from company to company, as the law states that the report has to be filed by the first day of the month in which the LLC was created. So, if you create an LLC in March, you have to file annually by March 1.
You may have heard that most registered LLCS are regarded as pass-through tax entities. What does this mean? It means that for the most part, the responsibility for paying federal taxes lies with the individuals that formed the LLC. The actual LLC itself doesn’t have to pay federal taxes.
Though LLCs themselves don’t generally pay federal tax, they still have to pay a state tax in Illinois, which is known as a personal property replacement tax. This tax is paid to the Illinois Department of Revenue (IDOR), using Form IL-1065. A typical LLC registered in Illinois will pay 1.5% of its net income to the state.
If the LLC has decided to be taxed as a corporation instead, the corporation income tax in the state of Illinois is a flat rate of 5.25% of federable taxable income, minus any relevant adjustments or exemptions. Business owners also have to contend with the personal property replacement tax, which amounts to 2.5% of net (not gross) income.
If your LLC employs people, besides the founding member or members, this will also impact your applicable tax rate in Illinois. First of all, you have to register your LLC with IDOR. Besides any federal employer tax obligations you may have, you have to withhold employee income taxes and make them payable to IDOR as well.
After that, your LLC has to regularly file withholding taxes using Form IL-501, and then file Form IL-941 on a less frequent basis. As the frequency with which these filings are required can differ from LLC to LLC, our certified public accountants (CPAs) can help to guide you through the specifics of the taxation rules as they apply to your company.
Lastly, any LLC with employers has to register with Illinois in order to pay state unemployment insurance taxes. Unlike the other state taxes that apply here, the unemployment insurance tax has to be paid to the Illinois Department of Employment Security, also known as IDES.
Filing these taxes will require you to first file a quarterly form reporting on your employees’ wages, and then pay any unemployment insurance taxes that might be due.
Even if you don’t have employees, if your LLC operates by selling goods to Illinois customers, you’ll owe sales taxes to the state. In that case, you have to register with IDOR (prior to filing) and make sure you are collecting and paying the state sales tax on the goods you sell. After collecting sales tax, you have to periodically file your sales tax returns to IDOR, either via Form ST-1 or online.
We recognize that addressing taxation and tax liability is one of the most complex and least desirable parts of running a company for most business owners. We hope this article helped address some of your concerns regarding Illinois state tax for LLCs. If you want individual consultation, filing services, or other advice, our experienced and knowledgeable CPAs can help you navigate the process quickly and easily, minimizing your tax-related stress and anxiety so you can focus on doing what you do best: running your company.