Sole Proprietorship vs LLC vs S Corp: Which Is Right For Your Business?

You’re starting a one-man or one-woman business. Or you’re ready to take your solopreneur act to the next level. But the U.S. government insists that you adopt a business structure for your young company.

While we’re not lawyers, today we’re sifting through some of the confusion of three of the most popular legal classifications for small businesses — the sole proprietorship, the LLC and the S corporation — so you as a solopreneur can establish and build your company with confidence.

A Sole Proprietorship

Unless you actively choose a different structure for your business, your company is a sole proprietorship.  And your name is the default company name. If you’d like to change that, file for a DBA (a “fictitious business name” or “doing business as”).

A sole proprietorship is the least complex and least expensive type of business to run. As a result, this business structure is the hands-down favorite for hobbyists and fledging solopreneurs.

In a sole proprietorship, the government views you and your business as the same entity. So, on paper, your personal assets and your business assets are considered one and the same. Even though, in practice, you should set up separate personal and business accounts. Consequently, you don’t need to report movement of money between your accounts if you’re withdrawing funds to pay yourself personally. Or if you’re investing personal assets in the business.

As a sole proprietor, tax time is fairly simple. That’s because earnings and business expenses are reported directly on your standard 1040 tax form. But without an employer covering part of your Social Security and Medicare, be ready to pay the self-employment tax. These payments are pay-as-you-go, so set quarterly reminders to submit estimated tax payments.

The downside to sole proprietorship

The downside to a sole proprietorship is that your business is linked to everything you own personally. So, while your young business may not have tons of value early on, a litigant who sues you in court can go after your personal holdings — your family’s money, your home and more.

As a result, it pays as a sole proprietor to protect yourself with insurance relevant to your type of business. For instance, you may want to consider business property, general liability, business income or professional liability coverages. The peace of mind is well worth the cost which may be lower than you think.


Consider changing your business structure when your business starts to make more money. Or when you reach the point that you’re concerned about your personal liability. And, as a solopreneur, your two best options are an LLC and an S corporation.

An LLC, or Limited Liability Company, has one or more owners called “members.”  Even as a single-member LLC, you’re afforded the protections of this unique structure that limits your personal liability.

At the same time, your business is taxed in a similar way that a sole proprietorship is. Instead of filing business taxes, you report earnings and expenditures on your personal tax form and pay self-employment taxes.

If you choose, you can opt for your LLC to be taxed as an S corporation or C corporation rather than as a sole proprietorship. Choosing an alternate form of taxation may save you money on your taxes, but you’ll run into additional fees along the way. Talk with a seasoned tax specialist if you need help weighing your options.

While there’s minimal setup required for a sole proprietorship in most states, you have to file legal paperwork to form an LLC. The filing fee will likely run you several hundreds of dollars. And you’ll probably want to pay for a lawyer or legal service like LegalZoom or Nolo to handle the setup on your behalf.

An S Corporation

An S Corporation, or S Corp, is the most complex and expensive of the three business structures to set up and maintain. So why would you choose S Corp? Filing as an S Corp not only protects your personal assets but also can yield significant tax savings — if you’re willing to jump through some extra hoops to grab them.

As an S Corp owner, you’re required to pay yourself a “reasonable” salary for someone in your industry. The payments your company makes to you personally are considered business expenses. So you’ll pay business taxes on your owners draw and personal taxes on your salary.

Because of the nature of taxation, you’ll need to file both personal and business tax forms as an S Corp. Plus, no matter what, you’ll have at least one employee. That means you need a way to run payroll based on your state’s requirements. Additionally, you may need to cover unemployment tax, worker’s compensation tax or other fees as an S Corp.

Weigh your options carefully before choosing to create an S Corp. You may create an S Corp from a sole proprietorship or an LLC, but you can’t revert back if you change your mind.

Above all, do your research, and talk with knowledgeable people. Seek out advice from a lawyer or tax professional to understand the complexities of these business structures. And use that information to determine which entity is right for you at each stage of your business journey.


Post a new comment