Guide · Three-way comparison · Last reviewed September 24, 2026
Sole Proprietorship vs LLC vs S Corp: The honest three-way comparison.
All three are common U.S. small-business structures. They differ in three places that actually matter:liability protection, paperwork burden, and federal self-employment tax. This page lays out the tradeoffs side by side, with the actual IRS formulas behind the tax piece.
At a glance
| Dimension | Sole Proprietorship | LLC (default) | S Corporation |
|---|---|---|---|
| Liability shield | None — personal assets exposed | Yes — separates personal & business | Yes — corporation is a separate entity |
| Formation | None — you are one by default | File with Secretary of State ($35–$500) | Form an LLC or corp, then file IRS Form 2553 |
| Federal tax filing | Schedule C + Schedule SE | Schedule C + Schedule SE (default disregarded) | Form 1120-S + Form 941 + personal 1040 |
| Self-employment / FICA | 15.3% SE on 92.35% of net profit | Same as sole prop | 15.3% FICA on W-2 salary only |
| Payroll required? | No | No | Yes — owner must take a W-2 salary |
| Annual cost (modeled) | $0 | $0–$800/yr (state report fee) | $0–$800/yr + ~$1,200 admin overhead |
| Best for | Very-low-risk side income | Most solo & small businesses | Profitable single-owner service businesses ($60K+ profit) |
Which one should you pick?
Stay a sole proprietor if…
- · Side income under ~$10K/yr, no employees.
- · Low liability risk (writing, consulting, freelance design).
- · You don't want to pay a state filing fee or file a separate return.
Form an LLC if…
- · Any real-world liability risk (clients on your property, advice, deliverables).
- · You want a bank account, contracts, and a clean separation between you and the business.
- · You're earning enough to justify the $35–$500 state filing fee (one-time).
Elect S-Corp if…
- · Net profit is consistently $60K+ and the salary you can defensibly pay yourself is materially lower.
- · You're already paying for a payroll service or willing to add one.
- · You're in a no-income-tax or low-fee state (TX, FL, WY, NV, WA, SD, AK, TN).
Run your numbers
The federal payroll-tax difference between an LLC (default sole-prop treatment) and an S-Corp election depends entirely on your net profit and your proposed owner salary. Run your specific numbers with theLLC vs S-Corp calculator.
Frequently asked questions
Is a sole proprietorship the same as an LLC?
No. A sole proprietorship is the default tax status of an unincorporated business — including a single-member LLC that has not elected otherwise. The IRS treats a single-member LLC as a 'disregarded entity' taxed as a sole proprietorship. Forming an LLC gives you state-level liability protection; operating as a sole proprietor gives you none.
Should I form an LLC if I am a sole proprietor?
Most U.S. small-business owners should. Forming an LLC separates your personal assets from business debts (the liability shield a sole proprietorship does not provide) for a one-time state filing fee that ranges from $35 to $500 depending on the state. The federal tax treatment is the same by default — both flow through Schedule C / Schedule SE.
When does an S-Corp election beat an LLC or sole proprietorship?
An S-Corp election reduces self-employment tax on the portion of profit that is taken as a distribution rather than W-2 salary. For a single owner earning $60K–$200K+ net profit with a defensible reasonable salary, the federal payroll-tax savings often exceed the additional bookkeeping and payroll cost. Below ~$60K profit the S-Corp admin overhead usually wipes out the savings.
Can a sole proprietorship elect S-Corp status?
No. S-Corp is a federal tax election available only to corporations or LLCs. A sole proprietor must first form an LLC (or incorporate), then file IRS Form 2553 to elect S-Corp treatment.
Do sole proprietors pay self-employment tax?
Yes. A sole proprietor pays 15.3% self-employment tax (12.4% Social Security capped at the SSA wage base, 2.9% Medicare uncapped) on 92.35% of net earnings via Schedule SE. This is the same Schedule SE computation that applies to a default-taxed single-member LLC.
Which is cheapest to start — sole prop, LLC, or S Corp?
Sole proprietorship: $0 (no formation required — you are one by default). LLC: $35–$500 state filing fee plus any state-required annual fee. S Corporation: the same as LLC if you elect S-Corp status on an existing LLC, or $100–$500+ to incorporate and then elect.
Which offers the strongest liability protection?
Both the LLC and the S Corporation (a corporation is a separate legal entity) shield personal assets from business liabilities. The sole proprietorship offers none — your personal assets (house, car, savings) are exposed to business debts and lawsuits.
Can I switch from sole proprietor to LLC or S Corp later?
Yes. You can form an LLC at any time; backdating is not permitted. Once the LLC exists, you can elect S-Corp federal tax treatment by filing IRS Form 2553. The election generally takes effect for the tax year in which it is filed and all subsequent years until revoked.
Do I need a separate EIN for each structure?
A sole proprietor can use their SSN or obtain an EIN. Once you form an LLC, the IRS requires a separate EIN for the LLC. An S-Corp election does not require a new EIN if you elect on an existing LLC that already has one.
Does an LLC have to elect S Corp?
No. By default, a single-member LLC is taxed as a sole proprietor (disregarded entity) and a multi-member LLC is taxed as a partnership. The S-Corp election is optional and only worth making in specific situations.
See your federal tax difference in 30 seconds.
The BizTaxMetrics calculator models the LLC vs S-Corp federal payroll-tax difference using the same IRS formulas in this guide. Free, no signup, updated for tax year 2026.