Tax Implications of LLCs and Corporations

A common misunderstanding by small business owners concerns the relationship between taxation and limited liability. Many owners mistakenly believe that, because their LLC is treated as a sole proprietorship or general partnership for tax purposes, somehow this means that liability in the LLC mirrors liability in these other business forms. The same misunderstanding arises when a corporation elects subchapter S tax status.

Really, there is no relationship. Taxation has nothing to do with liability. All of the owners of the LLC and corporation enjoy limited liability. How the LLC or corporation is taxed is irrelevant to the question of liability.