LLC, S Corp, or Sole Proprietor? Choosing the Right Business Structure

The way your business is structured affects how much tax you pay, your personal liability, and the amount of paperwork you'll handle each year. Here's a quick overview of the most common options.

Sole proprietorship

The simplest structure. If you start doing business on your own without forming an entity, you're a sole proprietor by default.

• Taxes: Business income is reported on your personal return, and you pay self-employment tax on net profit.
• Liability: No separation between you and the business; personal assets may be at risk.
• Paperwork: Minimal.

Limited liability company (LLC)

An LLC is formed under state law and creates a legal separation between you and your business.

• Taxes: By default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership, but an LLC can elect to be taxed as an S corporation.
• Liability: Generally protects personal assets from business debts when properly maintained.
• Paperwork: State filings and annual fees vary by state.

S corporation election

An S corporation is a tax election, not a separate type of legal entity. Both LLCs and corporations can elect S corp status.

• Taxes: Owners who work in the business pay themselves a reasonable salary subject to payroll taxes. Remaining profits can pass through without self-employment tax, which may create savings once profits reach a certain level.
• Liability: Depends on the underlying entity.
• Paperwork: Requires running payroll and filing a separate business tax return.

Which is right for you?

There's no one-size-fits-all answer. The right choice depends on your profit level, growth plans, state rules, and how much administration you're comfortable with. Many businesses start simple and change structure as they grow.

Let's talk it through

Choosing or changing your entity is one of the most valuable decisions to make with professional guidance. Schedule a consultation with Naulty & Co. and we'll review your numbers together.

This article is for general information only and is not legal or tax advice for your specific situation.