LLC vs S-Corp Tax Basis and Tax implication?

I am thinking about starting my first company and based on info from various website and from other sources such as books by NOLO, I have the following questions.

I read that S Corp tax basis in the business does not increase when the company takes on debt. Conversely LLCs can give their owner the tax benefits of any business debt. Since distribution of profit from LLC are taxable to the owner only when they exceed the owner鈥檚 tax basis, this mean that there may be tax advantage for LLC in the long run.

- If such is the case, if LLC borrow $1,000,000 to expand its business; this means it increases the owner鈥檚 tax basis in his capital (ownership) interest. The basis increases, in turn, means that the owner can receive up to $1,000,000 in distribution of profits from the LLC tax-free. By contrast, S Corp share-holders would have to pay taxes on that $1,000,000, as the the holders do not receive an increased basis when corporate borrow money. Is this correct?

Your basic assumptions are correct except that this method cannot be used to distribute PROFITS from the business tax-free. Owners of both LLCs and S-corps are taxed currently on a flow-through basis on the profits of the business. The owners get a corresponding basis increase as a result in both cases. The liability issue that you discuss does allow LLC owners to take distributions in excess of profits and cash investments without paying current tax. Note that this effectively creates a deficit in your investment in the LLC that will one day be treated as gain once the liability is paid off. Also note that the debt basis only allows you to take distributions. It does not give you additional "at-risk" basis with which to take losses, unless the liabilities are either recourse to you or are secured by a qualifying real property interest.