LLC, S Corp, or Sole Proprietor?
Choosing the right business structure is a critical financial decision. Here's what you need to know to protect your assets and optimize your taxes.
Sole Proprietor: Simple, but Risky
Best for: Freelancers, side hustlers, very early-stage solopreneurs.
Pros
- Easiest to start — no formal registration needed
- No separate business tax return (report on Schedule C)
- Minimal paperwork
Cons
- No liability protection — you and your business are the same
- Harder to build business credit or open a separate business account
- Subject to full self-employment tax (15.3%)
Bottom Line: Great for getting started, but risky long-term — especially if you're growing or have physical products/services.
LLC: Flexible, Credible, and Safer
Best for: Business owners who want liability protection and flexibility.
Pros
- Personal asset protection — your business and personal assets are separate
- Very flexible — can be taxed as Sole Prop, Partnership, or even S Corp
- Builds business credibility and legitimacy
- Only modest annual maintenance (state-specific fees)
Cons
- Must file separate registration with the state
- In most cases, still subject to self-employment tax unless electing S Corp
Bottom Line: The LLC is the go-to choice for small business owners, eCommerce sellers, and service providers who want structure and protection without too much overhead.
S Corporation (S Corp Election): Tax Smart
Best for: Established business owners making consistent profits (typically $50K+ annually).
Pros
- Biggest tax advantage: You can split your income into "salary + distribution" — and only pay payroll taxes (15.3%) on the salary portion.
- Avoids double taxation (unlike C Corps)
- Still provides liability protection
Cons
- Requires payroll setup — must pay yourself "reasonable compensation"
- More paperwork: file Form 1120-S + issue K-1 to shareholders
- IRS may audit salary levels if they suspect underpayment
Bottom Line: An S Corp can save thousands in taxes annually — if done right. It's a powerful tool for high-income solopreneurs and growing LLCs ready to level up.
At-a-Glance Comparison
| Feature | Sole Prop | LLC | S Corp |
|---|---|---|---|
| Setup Complexity | Easiest | Easy | Moderate |
| Personal Liability | No protection | Protected | Protected |
| Tax Filing | Schedule C | Schedule C or 1065 | Form 1120-S |
| SE Tax (15.3%) on All | Yes | Yes | Partial (only on salary) |
| Payroll Required | No | No | Yes |
| Ideal for | Freelancers | Growing businesses | Profitable LLCs |
Ready to Make a Smart Decision?
You don't have to guess. We'll help you understand the pros and cons for your specific situation so you can start and grow your business with confidence.