S-Corporations vs. LLC's

S-corporations and multi-member LLC's are taxed both as flow through entities. As flow through entities, in essence, the taxable income is passed from entity to the individual shareholders 1040 via a K-1.

However, there are differences between LLC's and S-Corporations. While both provide limited liability to the owners, LLC's permit losses in excess of basis, while S-corporations losses if in excess of basis are not deductible. While S-corp's are exempt from local tax, LLC gains are not.

With a tax on Medicare of 1.45% for both the employee and employer for example is another difference. For a highly profitable S-corporation, if a salary is paid of $106,800, which is the SE limit, and income in excess of this is paid to the shareholders in the form of a distribution, the gain is non-taxable for Medicare purposes.