Choosing a business structure affects your taxes, paperwork and personal risk. This guide compares LLC vs sole proprietor vs S corp in plain English for US freelancers and young founders.
Sole proprietor
The simplest option. You and the business are the same for legal and tax purposes. You report profit on Schedule C and pay income tax plus self-employment tax.
- Pros: no setup cost, minimal paperwork.
- Cons: no liability protection.
LLC
An LLC is a legal structure that separates your business from your personal assets. Taxes are the same as a sole proprietor by default for a single owner.
- Pros: liability protection, more professional, flexible taxes.
- Cons: state fees and some admin.
S corporation
An S corp is a tax election, not a separate type of company. An LLC or corporation can elect it. You pay yourself a reasonable salary through payroll, and remaining profit can be taken as distributions that are not subject to self-employment tax.
- Pros: potential savings on self-employment tax at higher profits.
- Cons: payroll, extra tax returns and accounting fees.
Comparison table
| Sole proprietor | LLC | S corp election | |
|---|---|---|---|
| Liability protection | No | Yes | Yes |
| Self-employment tax | On all profit | On all profit (default) | On salary only |
| Admin | Very low | Low | Higher |
| Best for | Testing an idea | Growing side hustles | Steady, higher profits |
When an S corp might pay off
An S corp election often only makes sense once profit is high enough that the self-employment tax saved is more than the extra payroll and accounting costs. Many accountants look at it once profit is consistently in the tens of thousands of dollars. Estimate your current tax with our Freelance Tax Estimator and track income across streams with the Side Hustle Income Tracker.
How to decide
- Start as a sole proprietor while you test the idea.
- Form an LLC when you want liability protection.
- Speak to a CPA about an S corp election when profits are steady and high.
An S corp savings example
Say your business earns $80,000 in profit.
- As a sole proprietor or default LLC: self-employment tax applies to roughly all of that profit, about $11,300.
- With an S corp election: if you pay yourself a reasonable salary of $50,000, payroll taxes apply to the salary, about $7,650 in total employer and employee share. The remaining $30,000 is a distribution that is not subject to those payroll taxes.
The potential saving of several thousand dollars must be weighed against payroll software, extra tax filings, accounting fees and any state taxes. The numbers are illustrative only; a CPA can run your exact situation. Estimate your current self-employment tax with our Freelance Tax Estimator.
What about C corporations?
A C corporation pays corporate tax on profits, and shareholders pay tax again on dividends. It is typically used by startups planning to raise venture capital or issue stock options to many employees. For most side hustles and small service businesses, it adds complexity without clear benefits.
Structures in other countries
| Country | Simple option | Company option |
|---|---|---|
| UK | Sole trader | Limited company (Ltd) |
| Canada | Sole proprietorship | Corporation (federal or provincial) |
| Nigeria | Business name (CAC) | Private limited company (Ltd) |
In each country, the company option usually offers liability protection and potential tax planning, but with more admin.
Checklist before choosing
- How risky is your work?
- How much profit do you expect this year and next?
- Do clients or platforms require a registered business?
- How much admin are you willing to handle?
Track profit across your income streams with our Side Hustle Income Tracker.
Next steps: choose your structure
Use this simple path as a guide.
- Testing an idea with small income: stay a sole proprietor.
- Earning steady income or taking on client risk: form an LLC.
- Earning consistently high profit: ask a CPA whether an S corp election saves money.
- Raising venture capital: consider a C corporation with legal advice.
- Review your structure every year as your business changes.
The right structure today may not be the right one next year, and that is normal.
For official, up-to-date guidance, see the IRS business pages.
Frequently asked questions
Is an S corp a type of business?
No. It is a tax election that an LLC or corporation can make with the IRS.
What is a reasonable salary?
A salary similar to what others are paid for similar work. The IRS can challenge salaries that are too low.
Can I switch structures later?
Yes. Many businesses start as sole proprietors and move to an LLC and S corp as they grow.
When should I elect S corp status?
Many accountants suggest considering it once your profit is consistently high enough that the self-employment tax savings exceed the extra costs. A CPA can calculate this for you.
LLC vs sole proprietor vs S corp: key takeaways
- Sole proprietor is simplest but has no liability protection.
- An LLC adds protection with little extra tax complexity.
- An S corp election can cut self-employment tax at higher profits.
- Get advice from a CPA before electing S corp status.
Last reviewed: September 2026. This article is general education, not personal financial, tax or legal advice. Rules, rates and limits change, so check official sources or speak to a qualified professional before making decisions. See our Financial Disclaimer.