“Should I be an LLC? An S-corp?” is one of the most common questions new business owners ask — and one of the most misunderstood. Here’s the plain-English version of how each is taxed, so you can choose the path that actually fits.
Sole proprietor
This is the default when you start earning on your own — no paperwork required. Your business income flows onto your personal return, and you pay income tax plus self-employment tax on the profit. It’s simple and cheap, but it offers no separation between you and the business.
LLC — and how it’s actually taxed
An LLC is a legal structure, not a tax one — which trips a lot of people up. By default, a single-member LLC is taxed exactly like a sole proprietor; a multi-member LLC is taxed like a partnership. The LLC gives you liability separation and a more professional footing, but on its own it doesn’t change your tax bill.
The S-corp election — and when it helps
An S-corp isn’t a separate kind of company; it’s a tax election an LLC or corporation can make. Its appeal is self-employment tax: you pay yourself a reasonable salary, and remaining profit can pass through without that extra tax. For the right income level, that can mean real savings.
The trade-off with an S-corp
Those savings come with responsibilities — running actual payroll, filing a separate business return, and paying yourself a salary the IRS would consider reasonable. Below a certain profit level, the added cost and paperwork can outweigh the benefit. This is where the math matters.
There’s no one-size-fits-all
The right structure depends on your profit, your growth plans, and how much administration you’re willing to take on. The good news: this is a very solvable question — a short conversation and a look at your numbers usually points clearly to the right choice.
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