Sole Proprietor, LLC, or S Corp? Here’s How to Make Your Choice

Whether you’re just starting your solo business or looking to improve your operations (and save some money), at some point you’re going to need to think about your business entity.

It sounds complicated, but your business entity is really just the structure you decide on for your business. Small business owners have a few different options and your choice affects things like your liability, taxes, and even how you’ll pay yourself.

It’s a big decision, but it doesn’t need to be a scary one. Let’s take a look at the most common business entities for solopreneurs and break down the information you need to make your choice.

Business Entity Basics: 3 Popular Options for Solopreneurs

As a solo business owner, there are generally three different business entities you can choose from. Your options are:

1. Sole proprietorship
2. Limited liability company (LLC)
3. Small business corporation (S Corp)

There’s quite a bit of overlap between these, but some distinct differences too. So, let’s quickly take a closer look at each one.

Sole proprietorship

Think of this as the starting point. If you haven’t done any paperwork to set up a formal business entity, then you’re running your business as a sole proprietor.

The good news about this route is that it’s easy—there’s nothing you need to do to “officially” establish your business as a sole proprietorship.

But the bad news is that sole proprietors have little to no protection. As the business owner, you’re responsible for all of the debts or legal issues your business encounters, and your personal assets (like your home or your savings account) could be at risk if your business gets into trouble.

Just like with any other type of self-employment, you’re responsible for paying your income taxes and self-employment taxes through your quarterly estimated tax payments. You’ll pay those on your total taxable income.

LLC

Setting up your business as an LLC requires a little bit of paperwork that you’ll file with your state (or you can let Lettuce do it all for you). However, that little bit of effort translates to a lot more protection for your business.

That’s because an LLC provides some separation between your personal assets and your business. If your business is in debt or gets sued, for example, your personal assets like your home and your savings account are typically safe.

Just like a sole proprietorship, you’ll pay income and self-employment tax on your total taxable income when you’re set up as an LLC.

S Corp

Here’s where things get a little confusing: An S Corp isn’t really a business structure (although it’s commonly referred to as one). It’s easier to understand it as a tax status or tax classification, meaning it only impacts how your solo business is taxed.

If you want to elect to be taxed as an S Corp, you’ll need a different business entity (like an LLC) first. Then, you elect to have your LLC taxed as an S Corp (again, Lettuce can do the paperwork for you). So, if you want to get technical, you’re really operating as an LLC and an S Corp.

What does it mean to be taxed as an S Corp? Well, to put it simply, you’ll pay less in taxes. Here’s why: When you operate as an LLC or sole proprietorship, you pay self-employment taxes on your total taxable income. But, as an S Corp, you split your business income into two categories:

• Your reasonable salary: You get to set a salary for yourself (e.g. $70,000 per year). This needs to be reasonable (meaning, similar to what you’d get paid to do that job as a traditional employee of a company). You’ll only pay self-employment taxes on this portion.

• Your business profits: You can still access and use this money in the form of owner’s distributions. However, this amount is not subject to self-employment taxes. This is where the tax savings come in.

Let’s say you had $175,000 in total revenue for the year, with $13,000 in business expenses. When you’re an LLC or sole proprietor, you pay self-employment tax on a taxable income of $162,000 (your revenue minus your expenses). That means you’d pay $24,758 in taxes.

Now let’s compare that to earning $175,000 in total revenue as an S Corp. You take a $70,000 salary and only pay self-employment tax on that amount. The rest ($105,000) can be taken in owner’s distributions but isn’t subject to self-employment tax. You’d pay $10,710 in taxes, saving you more than $14,000 in taxes for the year.

It might seem complicated, but this is the gist: Electing to be taxed as an S Corp can mean major tax savings, especially if you’re a high earner. Use Lettuce’s tax calculator to see how much you can save by making the switch and then let Lettuce do all of the hard work (yep, even the paperwork) for you.

How to Choose the Right Entity for Your Solo Business

Feel like a lot of information to digest? We get it—and we want to make your decision simple, not stressful. So, here’s a helpful chart that breaks down the major differences between sole proprietorship, an LLC, and an S Corp (meaning an LLC that’s taxed as an S Corp).

Yes, S Corps do come with a little more complexity, but don’t let that scare you. Lettuce can handle your S Corp election and all of the other administrative stuff for you, so you can get all of the benefits of that tax status without any of the elbow grease.

And, as you weigh your options, keep in mind that you don’t need to choose between an LLC and an S Corp. You can have the best of both worlds. Ultimately, an S Corp is an extra layer that adds additional tax-saving advantages to your LLC.

Still struggling to make your choice? Landing on the right business entity requires a little more thought than throwing a dart at a board, so here are a few questions to ask yourself:

• Do I want to protect my personal assets from any potential business debts and lawsuits?
• Do I want to lower my tax obligations as much as possible?
• Do I plan to grow my business beyond just me?

If you answered “yes” to any (or all) of those questions, then setting up your business as an LLC with an S Corp election is the best move.

Business Entities Without the Bewilderment

Your business entity has a big impact on a lot of aspects of your solo business, including how much protection you get and how much you pay in taxes.

While a sole proprietorship might seem like the easiest option, that doesn’t make it the best. Sure, you’ll skip any setup paperwork, but you’ll also pay more in taxes and put your personal assets at risk.

Ultimately, for solopreneurs who make over $70,000 who want to increase their protection while decreasing their tax obligations, an S Corp is the best choice. And, remember, setup doesn’t need to be a headache. Lettuce will establish your LLC, file your S Corp election, and manage all of the nitty-gritty—like your payroll and taxes—completely for you.

Ready to choose your business entity based on information rather than intimidation? Get started with Lettuce today.