LLC vs. an S Corporation

The LLC and S corporation are both alternatives to the C corporation, which is the way larger companies are typically structured.

These two offer essentially the same liability protection to members and shareholders (respectively) as the C Corp, but they're different in that any profits or losses are distributed to the personal tax return of the owners and treated accordingly. With a C Corp, profits and losses stay with the company.

The LLC and S corporation differ in other ways as well. The LLC is a limited liability company, which is governed by an organizational agreement, not unlike a partnership. As a result, corporate formalities may not apply.

The S corporation, however, is a corporation that must have the usual corporate organizational documentation and structure. It must be treated as a separate entity, otherwise you run the risk of forfeiting the limited liability aspect, and having a creditor or plaintiff "pierce the corporate veil" to gain access to the assets of the estates of owners.

Another difference: an LLC can allocate tax losses among its members irrespective of ownership percentage. An S corporation cannot do this, and must pro rate tax losses among its owners.

Before forming an LLC or S corporation, you should speak to an attorney and CPA about the specific laws that apply in your state.