Final answer:
Owners might choose an LLC for its flexible profit distribution and management, as well as its various taxation options. An S corporation, in contrast, allows owners to draw a salary and receive dividends, potentially saving on self-employment taxes, but operates under more rigid structures and shareholder limitations.
Step-by-step explanation:
An owner might prefer an LLC over an S corporation for tax purposes based on a few key factors. With LLCs, members enjoy a flexible management structure and can distribute profits as they see fit, which might not align with their ownership percentages. LLCs also allow for flexible member contributions that can include money, property, or services. Another advantage is the flexibility for the owners to choose how they want to be taxed, as an LLC can be taxed as a sole proprietorship, partnership, or as a corporation.
Meanwhile, choosing an S corporation may be preferable for owners who seek to take advantage of the ability to pay themselves salaries plus receive dividends from the company earnings, which are not subject to self-employment tax. Additionally, S corporations may appeal to businesses that aim for a traditional business structure with a board of directors and corporate officers, and those companies that aspire to easily transfer ownership through the sale of stock. However, S corporations are subject to stricter regulations than LLCs, and they have limits on the number and type of allowed shareholders.