LLC vs S-Corp in Illinois

Illinois taxes individual income at a flat 4.95% and imposes a separate Personal Property Replacement Tax on pass-through entities, which changes the LLC vs S-corp math for a trade business. The Illinois Secretary of State handles the entity filing. The IRS handles the tax classification via Form 8832 and Form 2553. The Illinois Department of Revenue reports S-corp activity on Form IL-1120-ST. An Illinois LLC can elect to be taxed as an S corporation. Illinois LLC basics. - Articles of Organization (Form LLC-5.5) filed with the Illinois Secretary of State, Department of Business Services. - Filing fee is $150. - Annual report required every year, due before the first day of the LLC's anniversary month. The annual report fee is $75. A $100 penalty applies for late filing. - Single-member LLCs default to disregarded entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with Form 2553. - Illinois Personal Property Replacement Tax applies. For partnerships and LLCs taxed as partnerships, the replacement tax rate is 1.5% of Illinois net income. A disregarded-entity single-member LLC does not owe replacement tax at the LLC level; the income flows to the owner's return. Illinois S corp basics. - An S corporation elected under federal law is not subject to Illinois corporate income tax at the entity level. Illinois follows the federal pass-through treatment for income tax purposes and taxes S-corp income to the shareholders on their individual returns at the 4.95% rate. - Illinois does impose the Personal Property Replacement Tax on S corporations at 1.5% of Illinois net income, filed on Form IL-1120-ST. The C-corporation rate is 2.5%. - Illinois Franchise Tax. The 2019 phase-out was reversed in 2021. As of 2026, the franchise tax remains in place and only the first $1,000 of liability is exempt. S corps and LLCs taxed as S corps do not owe the franchise tax, because the franchise tax applies to corporations authorized under the Business Corporation Act, not to pass-through LLC entities. A domestic corporation that elected S status still pays the franchise tax on paid-in capital. - Payroll. An S corp must pay its owner-employee a reasonable W-2 salary. Illinois has state unemployment insurance (SUI) through the Illinois Department of Employment Security, which applies once the business crosses the wage threshold. Why an Illinois trades shop might elect S corp. The main reason is federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids self-employment tax. Illinois adds its own wrinkle: the 1.5% replacement tax applies to S-corp and partnership income at the entity level, so the savings math needs to include that 1.5% against the federal payroll tax savings. Rule of thumb. Start as an Illinois LLC. When annual profit after a reasonable owner wage is high enough that federal payroll tax savings clear the payroll, retirement plan, accounting costs, and Illinois replacement tax, elect S corp. A CPA with Illinois construction clients can run the breakeven for your numbers and confirm the Illinois annual filings.