S Corp vs LLC

S corp vs LLC tax treatment limitations

Tax treatment is one major difference between an S corp and an LLC. In general, the tax advantages associated with an S corp's business debts cannot be passed to the shareholders unless the shareholders have personally loaned the S corp the money. Consequently, the tax basis of the shareholders of the S corporation does not increase when the S corporation takes on more debt.

Comparing this aspect of an S corp vs and LLC, an LLC can give its owners the tax benefits of most business debt. That means the tax basis of the owners of the LLC increases when the company takes on debt.

Why is high tax basis desirable?

The higher the tax basis the less tax the individual pays the IRS. Distributions of profits from the LLC (and S corp similarly) are taxable to the owner or shareholder when they exceed the owner's tax basis in the LLC or S corp. Consequently, owners of an LLC vs S corporation pay less tax on the profit distributed to them. This is a big difference between S Corp and LLC. If the LLC or S corp is likely to incur a large amount of debt in the business, owners of the LLC will be at an advantage vs owners of an S corp.

Benefit of S corp over LLC

There is one advantage S corporations have over LLC.  S corporation shareholders do not pay self employment taxes which include Social Security and Medicare taxes on their share of profits distributed from the S corp. LLC owners may have to pay self employment tax on profits passed through to them by the LLC.

There are other differences between an S corp and an LLC. The above are just some main differences between an S corp vs an LLC.