If the business is in IL, then that is where the LLC should be domiciled. If you are also conducting business activity in NYC, such as having a showroom, hiring a sales team, warehousing, etc then that entity should be qualified in NY as well (or the other way around, so long as there is a proper registration in each jurisdiction).
Regards to which entity type is really something that should be fleshed out over a thoughful conversation with your lawyer or accountant. As a general rule of thumb, I prefer LLCs (lawyers will all have their opinions about this of course) unless your expected revenue far exceeds what you could claim as a reasonable salary to pay yourself for running such a business. If the rev is in excess of that threshold an S-Corp may be a better option as you will be able to legally shelter some of your income by taking a dividend which will obviate self-employment tax for that portion. But you really need to understand the limits of what you can do and many entrepreneurs get in trouble here because of overzealous ratios.
Obviously, you have several legal considerations when starting a business and the above just scratches the surface.
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Mr. Natoli's response was pretty accurate. I would add that its better to pay an accountant and attorney at the start-up phase to do this properly and avoid problems than to pay them letter to solve problems.
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Very accurate but wanted to add a couple points regarding taxes.
First you have to qualify to own an S-Corp. If you don't, then the choice has been made for you - LLC. After that - provided you qualify for both, the only real difference between the two is TAXES.
The choice then comes down to a few different variables you failed to include. Most importantly - will you be actively managing the LLC or will a manager or other member be managing?
As mentioned, your entity choice SHOULD be determined at least in part by clever tax avoidance. As an LLC you are personally taxed on all profits regardless of the amount, and regardless of actual takings by members.
In addition, if you are an active managing member, you will have to pay self-employment tax. However, if you are using a manager, or using a member-manager other than yourself, then the members do NOT have to pay self employment tax - and an LLC is preferable as a tax entity. In addition, LLCs are less expensive in compliance costs, and it will save you money to a degree.
That "degree" occurs typically around $40,000 in profits. At that point, the balance of having to pay self-employment tax and compliance costs starts to shift towards an S-Corp preference. Why? Because in an S-Corp you can retain earnings inside the business. This reduces the income tax and self-employment tax, and allows you to invest the money pre-tax.
However, in some states, such as California, an added surcharge tax of 10% is added to companies that make more than $250,000 dollars a year. Thus an LLC in a state like CA is a horribly bad choice. I am unsure of the tax laws in IL or NY, so a discussion with a very knowledgeable accountant would work wonders.
So to sum up, absent a state tax hit like CA, an LLC will give you the best of both worlds. You can be taxed as an LLC until you obtain revenue in excess of $40,000, and then can elect to be taxed as an S-Corp.
With smart knowledge of the system, you have an advantage others don't.
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