| Feature | S-Corporation (S-Corp) | Partnership |
| Loan Basis | Loan taken by S-Corp does not increase shareholder basis automatically, even if personally guaranteed. | Partner’s basis increases by the amount of personally guaranteed loan, allowing for better deductibility of losses. |
| Deductibility of Losses | Losses may be limited/disallowed if shareholder basis is insufficient. | Losses can usually be fully deducted on personal return, subject to basis limits. |
| Ownership Flexibility | Limited to individuals, certain trusts, and estates; max 100 shareholders. | Partners can be individuals or entities; flexible structure allows multiple owners. |
| Tax Flow-Through | Income/loss flows through to shareholders, but loss limitations may apply. | Income/loss flows directly to partners based on ownership percentage; generally fully deductible. |
| Loan Guarantees | Personal guarantee required for loans; does not affect basis. | Personal guarantee increases basis, maximizing deductions for losses. |
| Best Use Case | Small businesses with wages, active operations, limited real estate investments. | Real estate investments, especially leveraged properties, where maximizing loss deductions is critical. |
| Cash Flow Impact | Losses may be trapped until basis increases, potentially limiting tax relief. | Immediate recognition of losses enhances cash flow and reduces tax liability. |
This comes up in our client stories a lot, specifically for people who want to invest in real estate.