When experienced developers set up their business entity for construction projects, the two most common choices are Limited Liability Companies (LLCs) and S-Corporations (S-Corps).
Both offer liability protection and pass-through taxation, but their legal structure, operational rules, and financing implications differ significantly.
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What are the key structural differences between an LLC and an S-Corp?
An LLC is a flexible business entity that allows one or more members to own and manage the company. LLCs can be taxed as a sole proprietorship, partnership, or elect S-Corp taxation using IRS Form 2553.
An S-Corp, on the other hand, is a tax status that applies to corporations or LLCs that qualify under IRS rules. It has strict shareholder requirements, limits on the number and type of owners, and specific rules about how income is distributed and taxed.
These foundational differences impact not only how you run your company but also how lenders evaluate your entity when applying for construction financing.
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How does each entity type affect construction loan eligibility?
From a lending perspective, business structure matters.
Construction loans require lenders to assess the financial strength, liability exposure, and management control of the borrowing entity.
- LLC construction financing is often favored in real estate because of its simplicity and clarity. Lenders can review the operating agreement to verify ownership, understand member roles, and confirm who is authorized to sign on behalf of the entity. If the LLC is manager-managed, it’s easy to confirm control. If member-managed, the structure still works well, especially when supported by a clear track record and capital contribution statement.
- S-Corp construction loans can be more complex due to ownership and compensation rules. S-Corps must issue a reasonable salary to owner-employees, which can complicate underwriting. Lenders also must navigate shareholder limits, potential restrictions on ownership changes, and more rigid distribution rules.
In both cases, the experience level of the developer (minimum of 3 completed projects) and the loan amount ($750K–$5M for Marquee loans) will drive the approval decision.
But LLCs tend to provide a cleaner path to financing approval, especially when the project involves multiple partners or entities.
Which structure offers better tax advantages for developers?
Tax treatment is often the tipping point between choosing an LLC or electing S-Corp status.
LLCs enjoy flexible pass-through taxation
Profits flow directly to members, who report their share on a Schedule K-1. There’s no entity-level tax, and members can deduct legitimate business expenses, including depreciation, mortgage interest, and project-related costs. This flexibility allows for real-time tax planning and income allocation based on project cycles.
S-Corps also offer pass-through taxation, but with a significant distinction
Owner-employees must pay themselves a “reasonable salary,” which is subject to payroll taxes (Social Security and Medicare). Only distributions beyond that salary are exempt from self-employment tax.
This can create tax efficiencies, but only if the developer maintains a strong accounting system and complies with IRS salary guidelines.
S-Corp status can also limit flexibility in distributing profits unevenly among shareholders, which is often a downside for real estate developers with unequal capital contributions.
For construction-focused entities, especially those managing capital-heavy, unevenly distributed projects, LLCs often provide better tax adaptability.
How do distributions and compensation work for LLCs vs S-Corps?
This is one of the most important distinctions for developers planning cash flow around a construction loan.
LLCs can distribute profits to members in any proportion, as long as it’s documented in the operating agreement. This is ideal for development partnerships where one member may contribute land, another cash, and another construction expertise.
The ability to align distributions with contribution, not just ownership percentage, provides critical flexibility.
S-Corps, by contrast, must distribute profits strictly in proportion to share ownership. If you own 40% of the S-Corp, you get 40% of the profits. Period. There’s no legal way to adjust distributions based on effort, risk, or role in the project.
Additionally, S-Corp owners must be treated as employees and paid a salary through payroll. This can complicate draws and repayments when working with business entity construction loans, which are typically based on milestone completions rather than fixed monthly salaries.
For real estate developers, especially those running multiple simultaneous projects, the LLC model better matches the irregular income and expense patterns of construction cycles.
What do lenders like Marquee Funding Group look for in LLC construction financing?
Marquee Funding Group specializes in construction loans for business entities with 3+ completed projects.
From this vantage point, the LLC is often the entity of choice for qualified borrowers.
Key advantages include:
- Simplicity in documentation: Operating agreements provide a clear view into ownership and control
- Flexibility in ownership changes: Adding or removing members is straightforward with proper amendment filings
- Streamlined underwriting: Lenders can focus on the entity’s track record and capital, rather than navigating payroll structures
- Risk segmentation: Developers can form project-specific LLCs, isolating liability to each venture
Marquee reviews each LLC’s structure, experience, and project feasibility to ensure the loan fits within its $750K–$5M range.
While S-Corps are not disqualified, LLCs align more naturally with the development finance model.
Are there scenarios where an S-Corp makes more sense for construction?
Yes, but they’re typically tied to longer-term holding strategies or companies with established payroll infrastructure.
Example scenario
A construction firm that builds and holds commercial properties as part of an ongoing portfolio may benefit from S-Corp treatment if it already has full-time employees and structured compensation systems.
In this case, using an S-Corp could reduce self-employment taxes and provide a cleaner separation between salary and profit.
Similarly, a family-owned development firm with centralized ownership and consistent profit margins may use an S-Corp to streamline distributions among owners.
But even in these cases, many developers still use LLCs for individual projects and reserve S-Corp status for the parent company.
How should experienced developers choose between an LLC and an S-Corp?
There is no universal answer, but there is a strategic framework.
Choose an LLC if:
- You’re managing multiple short-term construction projects
- You need flexibility in how partners contribute and get paid
- You want a clean separation between projects and entities
- You value simplified compliance and documentation
Consider an S-Corp if:
- You operate a centralized development firm with employees
- You pay yourself a consistent salary and reinvest profits
- You’re planning to hold assets and generate a steady cash flow
- You have a dedicated CPA managing your distributions and tax planning
Whichever route you choose, the key is alignment. Your entity structure should match your operational model, your financing strategy, and your growth goals.
S-Corp vs LLC for construction loans: The bottom line
Choosing between an LLC and an S-Corp is about more than taxes; it’s about control, flexibility, and your ability to scale.
For most construction-focused developers, especially those applying for loans in the $750K–$5M range, the LLC remains the preferred structure due to its ease of setup, flexibility in distributions, and compatibility with real estate underwriting.
Marquee Funding Group supports experienced developer business entities, LLCs and S-Corps alike, but evaluates each structure through the lens of project execution and risk.
Need help aligning your entity with the right construction loan strategy? Apply with Marquee Funding Group now to get expert guidance and fast financing for your next project.