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S Corporation or LLC

A Limited Liability company on the other hand is a company that reaps the benefit of the limited liability protection of a corporation and the tax pass-through advantage of a partnership company.

If you are contemplating on the pros and cons of S Corporation and LLC (Limited Liability Company), here is a comparison of S Corporation and LLC to help you in your pursuit.

Major differences:

  • S Corporation controls who can or cannot be a shareholder.
  • Allotment of earning is confined to owners or shareholders of a company.
  • Inability of S Corporations in increasing the pass-through losses.

Rigidity in assigning ownership

  • The S corporation controls who or what type of entity can share in ownership.
  • A C corporation is barred from being a shareholder in an S Corporation.
  • S Corporation restricts some trusts from being a shareholder.
  • The maximum number of shareholders that can be a part of S Corporation is limited to 100.

The distribution of income

Unlike a LLC, where members are paid according to the operating agreement, shareholders of an S Corporation earn their income in the same percentage as their ownership.

Another comparision of S Corporation and LLC can be given in reference to allocation of stock

Although shareholders of an S Corporation are allocated voting and non-voting shares, they are allowed to own only one class or category of stock. There is no option for them to opt for preferred stock or common stock.

LLC offers these choices to its members without adding any condition.

Pass-through and income tax

In certain situations, the IRS gives a leeway to LLCs and S Corporations to pass-through the losses to the members or shareholders. This helps in reducing the members or shareholders’ overall personal tax liability.

The drawback of S Corporations is that they lack the ability to augment or raise the losses of  pass-throughs. LLCs on the other hand, utilizes this scope to the fullest. They have the capability to increase their pass-through losses.

LLC and real estate investments

Generally, the taxes on members or shareholders of LLCs and S Corporation is equivalent to their investments in corporation or LLC. The difference is that LLC members can include the sum of the mortgage to their tax basis for calculating a loss.

For example,  If  you had invested $5 in real estate, your tax basis is $5. Now say you mortgage your business and borrow $10. The rental income and values declines leaving your real estate business with a loss of $10 at the end of first year. In simple words, you have lost $10 by investing in real estate.

In the case of an S Corporation, the IRS will allow you a $5 loss on your personal income tax. The remaining $5 will be deferred.

In the case of a LLC, you will be allowed to add your mortgage to the basis for calculating your loss. You can deduct the entire $10 loss in one year.

These are the major points to consider when you think about the comparison between S Corporations and LLCs.

About Brian Davis

LLC expert author and advisor. Has advised thousands of entrepreneurs over the last 15 years on which business structure is right for them. Brian is not an attorney or tax professional. If you need tax or legal advice, seek the assistance of a local attorney or CPA.

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