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When it comes to forming your new business, the state you choose to incorporate in is vitally important. Perhaps you live in Illinois, but you’ve heard good things about forming in Delaware. Maybe Delaware is where you’re from, but you’ve moved to Chicago. Which state is best for incorporation? That’s what we’ll help you figure out.
Statistics on Forming a Business in Illinois
- As of 2021, Illinois is home to over 1.2 million small businesses.
- These small businesses employ over 2.5 million people.
The Popularity of Forming a Business in Delaware
- Delaware was home to almost 250,000 business registrations in 2020 alone, with most of these being for larger businesses.
- More than two-thirds of Fortune 500 businesses are incorporated there.
- More than 93 percent of Initial Public Offerings were for corporations registered in Delaware.
Why Delaware Is Such a Popular State for Incorporation
There are a few reasons for Delaware’s popularity:
- Delaware’s corporate laws provide predictability and flexibility for businesses while also providing extra safety for investors.
- Delaware does offer some tax advantages and flexibility for investors and shareholders.
- Delaware charges a flat, yearly franchise fee that does not vary with a business’s earned income, unlike many other states.
So, should you incorporate in Delaware if you don’t actively do business or live in the state? While you certainly can, there are two reasons it may be better to file in the state you live in.
Firstly, the majority of the corporate laws and protections provided by incorporating in Delaware tend to protect much larger enterprises and C Corporations. If you’re forming an LLC, which is the best choice for most small businesses, a lot of these laws won’t be that applicable.
Secondly, you will need to create a “Foreign Corporation” or “Foreign Qualification” for any state you want to do business or operate in outside of Delaware, and each of those comes with its own rules and costs. This means you’ll be paying to incorporate in Delaware and you’ll also have the financial and administrative overhead of filing in your home state.
For most business owners, forming a business where they live and carry out business operations is the best choice.
Incorporating in Illinois vs. Delaware
The Costs and Speed of Incorporating in Illinois vs. Delaware
- The standard filing time for forming a business is five weeks in Delaware and three weeks in Illinois.
- The state fee for filing an LLC is $90 in Delaware and $150 in Illinois.
- The expedited filing time for forming a business is three business days in Delaware and one business day in Illinois.
- The additional expedited filing fee for an LLC is $100 in Delaware and $100 in Illinois.
The Forms and Process for Incorporating an LLC in Delaware or Illinois
Here are the common LLC formation steps you will need to follow in both Illinois and Delaware.
- Gather information from the managers and members of your LLC.
- Search for and choose a unique business name.
- Check that the name is not already taken in the state you want to form in.
- Provide an official address for your LLC.
- Assign a Registered Agent for your LLC.
- Get an Employer Identification Number (EIN) from the Internal Revenue Service.
Here’s how the process differs in Delaware and Illinois.
- In Delaware, you will fill out, complete and file a “Certificate of Formation” with the Delaware Divison of Corporations. Bizee can help.
- In Illinois, you will fill out, complete and file “Articles of Organization (Form LLC-5.5)” with the Illinois Secretary of State. Bizee can help.
Tax Implications for Delaware vs. Illinois LLC Incorporation
One of the most important aspects of where you choose to incorporate will be the type and amount of taxes you pay. The following taxes will be identical for LLCs in both Delaware and Illinois:
- LLC owners pay self-employment tax on business profits unless they have elected to be treated as an S Corporation, which means you only pay self-employment tax on a salary, not on distributions.
- LLC owners pay federal income tax on any profits, less federal allowances or deductions.
- Employers pay payroll tax on any salaries they pay to employees.
- Employees pay federal and payroll tax on their earnings.
State Taxes in Illinois vs. Delaware
LLC owners and employees will also need to pay state income tax on profits, earnings or wages.
- Delaware state tax varies between 2.2 percent and 6.6 percent based on net income after state allowances or deductions in progressive tax bands.
- Delaware does have a corporation income tax, but this does not apply to LLCs.
- Illinois state tax is paid at a flat rate of 4.95 percent based on net income after state allowances or deductions.
Sales and Use Tax in Illinois vs. Delaware
If you sell physical products or certain types of services, you may need to collect sales tax (also known as sales and use tax) and then pay it to the state.
- Delaware does not have a sales and use tax, so there is no tax to collect or pay on products and services sold in the state.
- Illinois does charge a sales and use tax, which varies between different areas and cities, with examples being:
- Chicago sales tax rate is 10.25 percent.
- Aurora sales tax rate is 8.25 percent.
- Rockford sales tax rate is 8.75 percent.
- Naperville sales tax rate is 7.75 percent.
Your LLC may also need to pay a “franchise tax” and file a regular report.
- The Delaware franchise tax is paid each year for LLCs, typically at an amount of $175.
- Illinois charges a 1.5 percent replacement tax to multi-member LLCs and LLCs taxed as S Corporations or C Corporations on their net Illinois income. There may also be a small additional fee when you file your annual report.
No matter which state you're incorporating your business in, Bizee can help you every step of the way. Our $0 + state fee incorporation package can get your new LLC up and running quickly. We'll help you gather information and file all the necessary paperwork. Here's to your new business venture and much success along the way!
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