LLC vs S-Corp vs Sole Proprietorship: Which Is Right for You?

Choosing a business structure comes down to three things: how much liability protection you need, how you want to be taxed, and how much paperwork you're willing to deal with. A sole proprietorship is the simplest and cheapest option. An LLC adds liability protection without much complexity. An S-Corp can save you money on self-employment taxes once your income hits a certain threshold.

Here's a side-by-side comparison:

The rest of this guide breaks down each structure so you can pick the right one based on your actual situation — not generic advice.

A sole proprietorship is the default. If you start doing business without filing anything with the state, you're a sole proprietor. There's no legal separation between you and your business. Your Social Security number is your tax ID. Your personal bank account can be your business account (though you really should open a separate one).

Formation: Technically free. You might need a local business license ($25–$100 depending on your city) and a DBA ("doing business as") filing if you want to operate under a name other than your own. DBA fees run $10–$50 in most states.

Taxes: You report business income and expenses on Schedule C of your personal tax return. You pay self-employment tax (15.3%) on every dollar of net profit. That covers both the employer and employee portions of Social Security and Medicare.

The catch: Zero liability protection. If a client sues your consulting business or someone gets injured by your product, your house, car, and personal savings are fair game. That's the tradeoff for simplicity.

Sole proprietorships work well for freelancers, side projects, and anyone testing a business idea before committing to a formal structure. A freelance photographer doing weekend shoots or a consultant picking up a few clients on the side — a sole proprietorship keeps things simple while you figure out if the business has legs.

But the moment your revenue becomes meaningful or you face any real liability risk, you should be looking at an LLC.

A Limited Liability Company (LLC) gives you the liability shield of a corporation with the tax simplicity of a sole proprietorship. You file formation paperwork with your state, pay a fee, and your personal assets are protected from business debts and lawsuits.

Formation cost: Varies by state. Kentucky charges $40. Massachusetts charges $500. Most states fall in the $50–$200 range. For a full breakdown, see our guide to LLC costs by state.

Ongoing costs: Many states require an annual report ($0 in some states, $300+ in others like California, which also charges an $800 annual franchise tax). You may also want an operating agreement, an EIN, and a registered agent ($100–$300/year if you use a service).

Taxes: By default, a single-member LLC is taxed as a sole proprietorship (Schedule C). A multi-member LLC is taxed as a partnership. Either way, profits pass through to your personal return. You still pay self-employment tax on net income unless you elect S-Corp taxation — more on that below.

Where you form matters. Delaware, Wyoming, and Nevada are popular for their business-friendly laws, but if you only operate in one state, filing there usually makes the most sense. Our best states to form an LLC guide covers the tradeoffs.

An LLC is the sweet spot for most small business owners. Real estate agents, consultants, web designers — if you're earning real income and want to keep your personal assets separate, an LLC is usually the right call. The filing process takes 15–30 minutes in most states. Check our step-by-step LLC registration guide if you want to do it yourself.

An S-Corp isn't actually a business structure — it's a tax election. You form an LLC or a C-Corp, then file Form 2553 with the IRS to be taxed as an S-Corporation. The filing itself costs nothing. The IRS processes it in about 60 days.

The big advantage: Self-employment tax savings. As a sole proprietor or default LLC, you pay 15.3% self-employment tax on all net income. With an S-Corp election, you split your income into two buckets: a reasonable salary (subject to payroll taxes) and distributions (not subject to self-employment tax).

Say your business nets $120,000. As a sole proprietor, you'd pay roughly $18,360 in self-employment tax. As an S-Corp paying yourself a $60,000 salary, you'd pay about $9,180 in payroll taxes on the salary portion. The other $60,000 comes as a distribution — no self-employment tax. That's roughly $9,000 saved per year.

The trade-offs: You have to run payroll (even if you're the only employee), file a separate corporate tax return (Form 1120-S), keep corporate minutes, and pay yourself a "reasonable" salary. The IRS watches for owners who set their salary too low to dodge payroll taxes. A solo attorney making $200K can't pay themselves $30K and take the rest as distributions.

Added costs: Payroll service ($20–$60/month), CPA for the 1120-S return ($500–$1,500/year), and potentially a bookkeeper. These costs eat into your tax savings, which is why the S-Corp election usually only makes financial sense when your net income exceeds $60,000–$80,000 per year.

Below that threshold, the administrative overhead costs more than you save.

Taxes are usually the deciding factor. Here's how the math works at different income levels for a single-owner business with no employees.

At $40,000 net profit:

• Sole proprietorship / default LLC: $6,120 in self-employment tax + income tax on $40K (minus the 50% SE deduction)
• S-Corp: Pay yourself ~$35K salary. Payroll taxes: ~$5,355. Distribution: $5K (no SE tax). But add $500–$1,500 for CPA fees and $300–$720 for payroll software. Net savings: close to zero or negative.

At $100,000 net profit:

• Sole proprietorship / default LLC: $15,300 in self-employment tax
• S-Corp: Pay yourself $55K salary. Payroll taxes: ~$8,415. Distribution: $45K (no SE tax). CPA and payroll costs: ~$2,000. Net savings: roughly $4,800/year.

At $200,000 net profit:

• Sole proprietorship / default LLC: Self-employment tax maxes out on Social Security at ~$160K (2026), then 2.9% Medicare above that. Total SE tax: roughly $24,000.
• S-Corp: Pay yourself $80K salary. Payroll taxes: ~$12,240. Distribution: $120K. CPA and payroll: ~$2,500. Net savings: roughly $9,200/year.

The pattern is clear: the more you earn above $60K–$80K, the more an S-Corp saves you. For accounting firms and law practices pulling in six figures, the S-Corp election is almost always worth it. For a side-hustle photography business making $30K? Stick with the sole proprietorship or standard LLC.

Liability protection is the other major reason to move beyond a sole proprietorship. Here's what "limited liability" actually means in practice.

Sole proprietorship: You are the business. If your business gets sued, your personal bank accounts, your home equity, your car — everything is on the table. A client dispute, a contract gone wrong, a slip-and-fall at your office — any of these could put your personal finances at risk.

LLC: Your personal assets are generally shielded from business liabilities. If someone sues your LLC, they can go after business assets but not your personal savings or property (in most cases). The key word is "generally" — courts can pierce the corporate veil if you:

• Mix personal and business funds
• Don't maintain a separate business bank account
• Treat business money as your own personal piggy bank
• Commit fraud or illegal activity
• Undercapitalize the business (start with zero assets and tons of liability)

S-Corp: Same liability protection as any corporation. Personal assets are separated from business assets. The same veil-piercing risks apply.

For anyone running a business where things could go wrong — a consultant giving strategic advice, a real estate agency handling transactions, a contractor doing physical work — liability protection isn't optional. The $100–$500 you spend forming an LLC is cheap insurance compared to the alternative.

That said, an LLC doesn't replace actual business insurance. General liability insurance ($500–$1,500/year for most small businesses) covers lawsuits, property damage, and injuries. Professional liability (E&O) insurance covers mistakes in your professional services. You should have both, regardless of your business structure.

Skip the theory. Here's when each structure makes sense based on real scenarios.

Choose a sole proprietorship when:

• You're testing a business idea and want zero friction to start
• Your annual revenue is under $20K
• You have minimal liability exposure (selling digital products, freelance writing)
• You want to keep bookkeeping as simple as possible

Choose an LLC when:

• You're earning consistent income and want to protect personal assets
• Your business carries any real liability risk (client-facing services, physical products)
• You want flexibility — LLCs can be taxed as a sole proprietorship, partnership, S-Corp, or even C-Corp
• You plan to bring on partners or investors later
• You're a freelancer or web designer earning $30K+ and want credibility with clients

Choose an S-Corp (LLC with S-Corp election) when:

• Your net business income consistently exceeds $60K–$80K per year
• You're comfortable running payroll and filing a corporate tax return
• You have (or are willing to hire) a CPA familiar with S-Corp taxation
• You're in a high-earning service business: law firm, accounting practice, medical practice, senior consultant

One approach that works well: start as a sole proprietorship, form an LLC once you're earning steady revenue, and elect S-Corp taxation when your income justifies the added complexity. You don't have to pick one structure forever. Our how to start a business guide walks through the full sequence.

You're not locked into your initial choice. Business structures can evolve as your revenue grows.

Sole proprietorship to LLC: File Articles of Organization with your state, pay the filing fee, get an EIN from the IRS, and open a business bank account. This is the most common conversion and takes a few days in most states. Follow our LLC registration guide for the step-by-step process.

LLC to S-Corp (tax election): File IRS Form 2553 within 75 days of the start of the tax year you want the election to take effect. If you miss that window, you can file with a late election relief explanation — the IRS is fairly generous about granting these. Your LLC stays an LLC legally; only the tax treatment changes.

Sole proprietorship to S-Corp: You need an entity first. Form an LLC (or incorporate as a C-Corp), then file Form 2553. You can't elect S-Corp taxation as a sole proprietor directly.

S-Corp back to LLC (default taxation): You can revoke S-Corp status by filing a statement with the IRS, signed by shareholders holding more than 50% of shares. Once revoked, you can't re-elect S-Corp status for 5 years without IRS permission.

LLC to C-Corp: This is less common for small businesses but relevant if you plan to raise venture capital. You'd typically do a statutory conversion (available in most states) or form a new corporation and merge the LLC into it. VCs almost always require a Delaware C-Corp.

Timing matters. Conversions that change your tax treatment should ideally happen at the beginning of a tax year to keep accounting clean. Talk to your CPA before making any switch mid-year.

There's no universal answer, but there is a decision framework that works for most people.

Step 1: Assess your risk. Does your business involve advice, physical services, products, or anything where someone could get hurt or lose money based on your work? If yes, you need liability protection. Form an LLC at minimum.

Step 2: Look at your income. Earning under $50K? The sole proprietorship or basic LLC keeps things simple. Earning $60K–$80K+? Run the numbers on S-Corp savings. Earning $150K+? An S-Corp election is almost certainly saving you thousands per year.

Step 3: Factor in your tolerance for paperwork. S-Corps require payroll, corporate tax returns, and more rigorous record-keeping. If you hate admin work and don't want to pay a CPA $1,000+/year, a standard LLC might be the better fit even if you'd save a bit on taxes with the S-Corp election.

Step 4: Think about the future. Planning to bring on partners? An LLC operating agreement handles that well. Raising outside investment? You'll likely need a C-Corp. Staying solo and scaling revenue? The LLC-to-S-Corp path is your friend.

For most small business owners reading this — consultants, freelancers, real estate professionals, and service providers — the LLC is the right starting point. It costs $50–$500 to set up, takes less than an hour in most states, and gives you real protection from day one.

Once your income grows, add the S-Corp election. That two-step approach covers 90% of small businesses and keeps things as simple as possible at each stage.