Choice of entity refers to choosing the legal form for operating your business. A business may be operated as (1) a corporation; (2) a general partnership or limited partnership; (3) a limited liability company (LLC); or (4) a sole proprietorship. Each state has its own laws for the formation, operation, and maintenance of these business entities.

The primary considerations in choosing the best form for operating your business are (1) protecting your personal assets from the liabilities of the company; (2) tax strategies designed to deduct early losses, avoid double taxation, and convert ordinary income into long term capital gain at a lower tax rate; (3) an entity that will be attractive to potential investors and lenders; (4) an entity that allows you to offer equity incentives to employees (stock options); and (5) the cost of forming the entity and properly maintaining it—including filing the required documents with state agencies.

In Illinois, the choice of entity for operating a business is an important decision that affects legal liability, taxation, investment attractiveness, employee incentives, and administrative requirements. Corporations offer limited liability protection but can lead to double taxation, where the corporation's income is taxed, and dividends to shareholders are taxed again. However, S corporations and certain small businesses can avoid double taxation. General partnerships do not offer liability protection, while limited partnerships provide limited partners with liability protection but not general partners. Limited Liability Companies (LLCs) combine the benefits of limited liability protection and pass-through taxation, making them a popular choice. Sole proprietorships are the simplest form, with no separation between personal and business assets, leading to personal liability for business debts. Each entity type has different implications for equity incentives, with corporations typically being more conducive to offering stock options. The costs of formation and maintenance, including state filings, vary by entity type, with corporations and LLCs generally requiring more formalities than sole proprietorships or partnerships. Illinois law requires proper registration and compliance with the Secretary of State and other regulatory bodies, depending on the entity chosen.