LLCs provide a simpler alternative. In general, the owners of a corporation are not personally liable for the corporation's debts. Indeed, owners often incorporate their businesses primarily to gain protection from personal liability. Accordingly, the members of an LLC will ordinarily not be liable for the LLC's debts. Under Subchapter S, which is part of the IRC, a corporation pays no income taxes.
S corporations have several disadvantages.
The IRC regulations that govern S corporations limit the flexibility by which the owners may be compensated. For example, an agreement under which only one owner receives certain fringe benefits could violate the regulations, causing an immediate and automatic termination of the Subchapter S election. LLCs have much greater freedom to compensate their members than do S corporations. Subchapter S also restricts the ownership of S corporations. S corporations cannot have more than 75 owners, and nonresident aliens cannot be owners.