Self-EmploymentIntermediate7 min read

Sole proprietor, LLC, or S-Corp?

The business structure decision, stripped of legal jargon and run through the tax math.

When you start earning self-employment income, one of the first questions is 'do I need an LLC?' The honest answer: maybe, eventually, but probably not on day one. Picking the right business structure is a balance between legal protection, tax efficiency, and administrative overhead.

Sole proprietor

The default. The moment you earn a dollar doing freelance or contract work without forming anything, you're a sole proprietor. Your business income flows onto Schedule C of your personal tax return. You pay self-employment tax (15.3% on top of regular income tax) on your profit. Cheapest and simplest — zero legal setup, zero fees.

LLC (Limited Liability Company)

An LLC is a legal entity that separates your business liabilities from your personal assets. If your business gets sued, creditors usually can't reach your house or retirement accounts (assuming you keep finances properly separated — called the 'corporate veil'). For taxes, a single-member LLC is by default a 'disregarded entity' — it's taxed exactly like a sole proprietor. You get the legal shield without changing taxes.

S-Corp election

Once your self-employment profit gets large enough (usually around $50k–80k of profit per year), you can elect S-Corp tax treatment on your LLC. Under an S-Corp, you split your income into two parts: a reasonable salary (subject to self-employment tax) and distributions (not subject to self-employment tax). The savings can be $3,000–$10,000+ per year for higher earners.

S-Corps are not free

They require running payroll, filing a separate business tax return, and paying yourself a 'reasonable salary' that the IRS won't contest. Annual administrative cost: $1,500–3,000 between payroll services and an accountant. Don't elect S-Corp status until the tax savings exceed these costs by a comfortable margin.

The decision tree

Earning under $30k from self-employment: stay a sole prop. Not worth the complexity.
Earning $30k–80k with liability exposure: form an LLC for legal protection, keep default tax treatment.
Earning $80k+ of profit consistently: consider S-Corp election, run the math with an accountant.
Service businesses where you're the product (consultants, freelancers): LLC is almost always worth it once you're established.

Put this into practice

Worth tracks your accounts, budgets, and goals — so the concepts in this article aren't just theory.

Get started free