How do S corporations and LLCs differ?

An LLC is a similar entity to an S corporation since the owners of both entities enjoy limited liability and both entities can be taxed as either a proprietorship or partnership. An LLC member's risk is also limited to his loss of investment. However, a chief protective advantage of the LLC over the S corporation is that the LLC affords you more ownership options. For example, your LLC can be owned by a family limited partnership (FLP), a trust, another corporation, etc. S corporation shares cannot be owned by these entities. Their stock ownership is restricted to individuals. Both estate and asset protection planning then become more difficult with S corporation shares.

More importantly, an ownership interest in an LLC is considerably more creditor protected than are shares in an S corporation which can be easily seized by a stockholder's personal creditors. A member's interest in an LLC is creditor protected in the same way a partnership interest in a limited partnership is protected. A member's personal creditor is limited only to a charging order against the LLC interest, which gives the creditor only the right to receive distributed profits due the debtor partners.

There are still a few advantages of an S corporation over an LLC: (1) An S corporation can be more tax advantageously acquired by another business; (2) S corporation owners pay employment taxes only on their salaries, while LLC owners pay employment taxes on all profits; and (3) State taxes may be lower for an S corporation.