How does a S corporation differ from a limited liability company?

While LLCs and S Corporations are both taxed as so-called “pass through” entities, the S Corporation is strongly discouraged for the ownership of real estate because S Corporation shareholders may not be able to maximize their depreciation deductions. The reason for this potential pitfall is because the amount of tax loss that may be used by a shareholder or a LLC member is limited to the member/shareholder’s tax basis. The tax basis of shareholders and LLC members is computed very differently. For a LLC member, tax basis includes debt, but debt is not included in the calculation of tax basis for a shareholder of a S Corporation.

In addition, while S Corporations are limited to a single class of stock, there may be more than one class of economic interest held in the LLC, thus permitting special allocations of income, loss and cash flow among the members. Finally, while an S Corporation cannot include more than 75 shareholders, and permitted shareholders may not include corporations, partnerships, non-qualified trusts or foreign shareholders, none of those limitations apply to LLCs.