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A limited liability corporation (LLC) is a form of doing business that combines the limited liability for loans and lawsuits of a corporation with the “pass-through” tax benefits of a partnership. Pass-through taxation means that the business is taxed only once — at the member/shareholder level — rather than at both the member/shareholder and LLC/corporate level.

S corporations are also eligible for pass-through taxation, so why form an LLC instead of an S corporation? Because certain limitations are placed on S corporations that do not affect LLCs.

For instance, an S corporation must not have more than 75 shareholders, and the shareholders must be individuals, estates, or certain types of trusts. Corporations, partnerships, LLCs, and nonresidents may not be shareholders in an S corporation. All these entities, however, can be members in an LLC.

Another limitation placed on S corporations is that they may have only one class of stock. As a result, the financing options are limited. S corporations are not good tax shelters because deductions for losses are limited to the shareholder’s basis in the corporate stock.

LLCs have an advantage over S corporations when it comes to foreign investors. Because an S corporation cannot have nonresident shareholders, it is unable to have much interaction in the fast-growing international business market. Also, LLCs, unlike S corporations, are not subject to additional partnership tax status qualification requirements. LLCs must simply meet partnership tax requirements. LLCs need not elect partnership tax status and then be continually vigilant in order to retain such status as S corporations must.

For more information refer to the Self-Counsel book How to Form and Operate a Limited Liability Company.