So how does the S Corporation compare to the LLC which is also a pass through entity. The LLC offers the limited liability of the S corporation and pass-through taxation with none of the S corporation restrictions on ownership and operations. Thus, disadvantages of operating as an LLC would evolve around particular facts and circumstances of the parties and their preference of one form over the other.

Here is a list of some of the advantages/differences the LLC over the S Corporation.

1. Restrictions on Ownership. S corporations can have only one class of stock. Shareholders must be natural persons, and either U.S. citizens or resident aliens. An S corporation may have no more than 75 shareholders.

2. Special Allocations. S Corporations may not specially allocate tax attributes to its shareholders. Attributes pass through pro rata and this restricts the type of debt the corporation issues and can hamper efforts to shift control of family-owned businesses. The result is passive investments are more difficult to structure.

3. Deductibility of Losses. S corporations differ in the ability to obtain tax basis from its share of the entity's liability. This, in turn, determines the extent of losses that may be deducted by the owners, and their ability to receive operating distributions tax free. S corporation shareholders do not share in the entity liabilities and basis is limited to the cash actually invested. However, an LLC member and a limited partner increase their basis by the allocable share of entity liabilities. Also when an S Corporation distributes appreciated property trigger the gain passes through to the shareholders.

The Limited Liability Company: Previously we discussed sole proprietorships and it is important to remember that the one owner LLC is treated for tax purposes in the same manner. Hence profits are reported on your individual 1040 tax return as a part of Schedule C and self employment taxes must be paid. One must remember that this usually forces one into making quarterly estimated tax payments and that the self employment tax may have consequences beyond that of social security taxes. Also it is important to note that in both a single owner and multiple owner LLC all profits are taxed to the owners even though not distributed.

LLC’s with multiple owners are treated as partnerships for IRS purposes unless they elect corporate treatment under IRS Form 8832. Hence the LLC files IRS Form 1065, Partnership Information Return and each owner is given a Schedule K-1 showing each owners income/loss and is attached to their respective 1040’s.

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