S corporations and LLC’s are similar in both the way they provide liability protection to the owners and in the way they report taxes. Both provide limited liability protection to the business owners (For a more detailed discussion of limited liability protection in the Corporate Resource Guide Book).
It has been suggested that the liability treatment of S corporations (which are treated just like regular C corporations for liability purposes) is more predictable than LLC’s because they have been available for many more years than LLC’s and have a substantial body of legal cases which act as precedents in determining issues of liability. LLC’s are relatively new and there are fewer legal cases to help predict issues of liability.
Both S corporations and LLC’s are pass-through entities for tax purposes. The entities file an informational tax return but the individual owners, which are called shareholders in an S corporation and members in an LLC, report income and/or losses on their individual tax returns.
There are some differences in the way basis is determined for the purpose of determining losses. A discussion of tax basis is beyond the purpose of the book but can be discussed with your tax advisor.
Just keep in mind that if you are expecting substantial losses in the early stages of the business or if you are borrowing substantial sums of money for your business, the LLC may allow you to write off greater losses than you could if operating the business as an S corporation.
Did you like this? If so, please bookmark it,
