Income Taxes on Business Income in Illinois

April 13, 2006

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In Illinois, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.

Corporations. All C corporations are required to pay an annual corporate tax of 4.8 percent on the amount of income that the corporation reports to the IRS.

In addition, Illinois assesses a personal property replacement tax based on net income (2.5 percent for corporations, 1.5 percent for S corporations and all other incorporated entities) on all businesses even if they are not corporations.

S corporations. If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any IRS corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.

Illinois extends this favorable tax treatment to state corporate income tax liability, but only with respect to the 4.8 percent corporate income tax. The income your S corporation makes will still be subject to a 1.5 percent personal property replacement tax.

Partnerships. If you operate your business as a partnership, you will be subject to a 1.5 percent personal property replacement tax on your partnership's net income.

Limited liability companies. Illinois law recognizes businesses operating as limited liability companies (LLCs). As an LLC, your business will be treated, for tax purposes, exactly like a partnership. Accordingly, your LLC's net income will be subject to a 1.5 percent personal property replacement tax.