LLC vs S-Corp vs Sole Prop: Which Entity is Right for You?

Sole Proprietorship: The Default

If you haven’t filed any paperwork, you’re a sole prop by default. Simple, but you’re leaving money on the table once you hit $50k+ in profit.

Pros: Zero setup cost, minimal paperwork.
Cons: Self-employment tax on ALL profit, unlimited personal liability.

LLC: The Middle Ground

An LLC gives you liability protection without the complexity of a corporation.

Pros: Personal asset protection, flexible taxation (you can elect S-Corp treatment).
Cons: Self-employment tax still applies unless you elect S-Corp status.

S-Corp: The Tax Saver

Once your profit exceeds ~$60k, S-Corp election saves serious money on self-employment tax.

How it works: You pay yourself a “reasonable salary” (subject to payroll tax), and take the rest as distributions (no payroll tax).

Example: $100k profit.

• Sole Prop: ~$15.3k in self-employment tax.
• S-Corp (with $60k salary): ~$9.2k in payroll tax. Savings: $6,100.

Cons: Payroll complexity, state filing fees, stricter bookkeeping requirements.

The Verdict

• Under $50k profit: Stick with sole prop or LLC.
• $50k-$200k: S-Corp election is probably worth it.
• $200k+: Definitely S-Corp, possibly C-Corp depending on your growth plans.