Sole proprietorship vs S Corp comes down to one thing: keeping more of what you earn. As a sole proprietor, you pay self-employment tax on every dollar of profit. S Corp owners split their income into salary and distributions, saving thousands annually once they hit $80,000 in business income. It's a smart move that pays for itself.
Most solopreneurs start as sole proprietors by default. It’s the path of least resistance — literally zero paperwork required. But here’s the thing: that simple default can become expensive as you grow, potentially costing thousands in extra taxes once your business income reaches around $80,000, depending on your salary setup and state costs.
The question of sole proprietorship vs S Corp isn't just about business structures. It's about keeping thousands more of what you earn while gaining liability protection and strategic advantages that scale with your business.
Here's the core difference: sole proprietors pay self-employment tax on every dollar of profit. S Corp owners can split their income into salary and distributions—paying employment taxes only on the salary portion. That's where the savings come from.
With Lettuce, the entire process is automated — from formation to ongoing compliance— so you can focus on running your business instead of managing tax strategy.
Ready to see what you could save?
A sole proprietorship is the business world's default setting. According to the IRS rules, if you start doing business without filing any formation paperwork, you're automatically a sole proprietor. No state filings, no formal setup — you just start working and earning income.
Your business income flows directly to your personal tax return on Schedule C. You'll pay regular income tax plus the full 15.3% self-employment tax on 92.35% of your profit.
That self-employment tax covers Social Security and Medicare — the same taxes employees split with their employers. As a sole proprietor, you pay both halves. As your profits grow, this tax burden adds up fast, which is why many successful solopreneurs eventually make the switch to an S Corp.
As a sole proprietor there's no legal separation between you and your business. You own all the assets, but you also assume all the debts and liabilities.
If your business faces a lawsuit or can't pay its debts, creditors can come after your personal assets — your home, savings, everything. This setup gives you complete control, but it puts everything you own on the line.
An S Corp isn't a new business entity — it's a tax election that changes how your LLC gets taxed. You file Form 2553 with the IRS, and suddenly you're playing by different (better) tax rules. Same business name, same operations, just a smarter tax structure.
S Corps let you split your business profits into two buckets:
This split can save you thousands compared to paying self-employment tax on every dollar as a sole proprietor.
S Corps come with more requirements. You'll need to run payroll, file Form 1120-S, and keep better records.
But for solopreneurs earning $80,000+ in annual business income, the tax savings typically outweigh the extra work. Plus, you get liability protection — your personal assets stay separate from business risks.
Choosing between these structures comes down to trading simplicity for tax savings and protection. Here's how they stack up:
| Factor | Sole Proprietorship | S Corp |
|---|---|---|
| Tax Treatment | Pay 15.3% self-employment tax on most net earnings | Split income into salary (subject to self-employment taxes) and distributions (no self-employment taxes)— saving thousands annually |
| Personal Liability | Zero protection—no separation between business and personal assets | Legal barrier shields personal wealth from business debts and lawsuits |
| Setup and Compliance | Start immediately with no paperwork | Must file formation documents, run payroll, and maintain corporate formalities |
| Owner Compensation | Take money out freely as needed | Must pay yourself a reasonable salary first, then take remaining profits as distributions |
| Growth Flexibility | Limited to one owner; raising capital is difficult | Allows up to 100 U.S. shareholders but has limited access to financing and equity investment due to ownership and stock-class restrictions. |
| Break-Even Threshold | N/A | Makes sense at $80,000+ in annual business income. Above $100,000, could save $8,000+ yearly in self-employment taxes. However, the exact income threshold and potential savings depend on your specific circumstances. |
The math behind sole proprietorship vs S Corp tax savings becomes compelling once your business consistently generates $80,000+ in annual business income.
As a sole proprietor, you pay 15.3% self-employment tax on most of your net business income — 12.4% for Social Security and 2.9% for Medicare. But with S Corp status, you split your income into a reasonable salary (subject to payroll taxes) and business distributions (no self-employment tax). That split is where the magic happens.
Here's a real example: Say you earn $100,000 in business profit. As a sole proprietor, you'd pay roughly $14,130 in self-employment taxes (the IRS allows a small deduction in the calculation, but you're essentially paying on the full amount). But as an S Corp owner paying yourself $40,000 in reasonable salary, you'd only pay payroll taxes on that $40,000 — about $6,120 — while the remaining $60,000 in distributions stays completely free from self-employment tax. That's about $8,000 in annual savings.
The catch? The IRS requires you to pay yourself a "reasonable salary" based on your industry experience, time devoted to your business, and comparable salaries for similar roles. This is where many business owners spend hours crunching numbers and second-guessing themselves.
Lettuce determines your optimal salary split, handles all payroll processing, and ensures you stay compliant while maximizing your tax savings — so you don't have to think about it.
Wondering when to make the switch? The answer isn't about finding the perfect moment—it's about hitting a profit level where the tax savings are too good to ignore.
Here's your decision framework:
The earlier you switch after hitting these thresholds, the more you'll save over time.
Worried about the paperwork, costs, or running payroll? Here's why these common concerns aren't dealbreakers:
Lettuce handles all of this automatically — from setup to ongoing compliance — so you get the benefits without the administrative burden.
Smart business owners ask the right questions before making entity decisions that could save them thousands in taxes. Here are the answers that help you keep more of what you earn.
No. If you already have an LLC, you don’t need to start over, you just update your tax election. First, the LLC elects to be taxed as a corporation (Form 8832), then files Form 2553 with the IRS to elect S-Corp status. Your business name, operations, and structure stay the same — only your tax treatment changes.
The IRS typically processes Form 2553 within 60 days, or about two months, although processing times can vary depending on the workload. Lettuce can handle all the paperwork and can have your S Corp operational within 2-6 weeks, depending on IRS processing times.
Yes. Mid-year conversions still provide tax savings for the remaining months of the year. You can even make the election effective for the prior tax year if you file within two months and 15 days after the start of the tax year.
Sole proprietors typically pay more in taxes. As a sole proprietor, you pay 15.3% self-employment tax on all your profits. With an S Corp, you only pay payroll taxes on your salary portion — the rest comes as distributions that aren't subject to self-employment tax. On $100,000 in profit, this difference can save you around $8,000 annually.
Yes, especially once you're consistently earning $80,000+ in annual business income. The tax savings at this level typically outweigh the additional compliance requirements. High-earning freelancers making $100,000+ can save $8,000 or more per year. The higher your profits, the more advantageous the S Corp structure becomes.
You may face IRS penalties and interest charges (currently 7%). Lettuce automatically sets aside money for taxes with each payment you receive and pays your quarterly taxes for you, so you never have to worry about missing a deadline.
With Lettuce, there are no formation fees. Our pricing starts at $0/month for Lettuce Grow, with S Corp formation and management available in our paid plans starting at $200/month.
You can revoke your S Corp election if it no longer makes financial sense. The structure is flexible — you're not locked in forever.
Not necessarily. Lettuce automates all S Corp compliance, including payroll, tax filings, and quarterly payments. Everything is handled through one platform, eliminating the need for multiple vendors or services.
Your salary is what you pay yourself as an employee of your company (subject to payroll taxes). Distributions are profits you take from the business (not subject to self-employment tax).
The sole proprietorship vs S Corp decision comes down to one question: Are you ready to keep more of what you earn?
If you're in the S Corp sweet spot, the S Corp structure can save you thousands in taxes every year. The switch isn't permanent, the process isn't complicated, and with the right tools, the administrative work becomes automatic.
Lettuce handles everything — from formation to payroll to quarterly tax payments — so you can focus on growing your business instead of managing compliance. You get the tax savings without the headache.
Ready to see how much you could save? Use Lettuce’s tax calculator to find out what switching to an S Corp could mean for your bottom line.