For Self Employed: Sole Proprietor vs. LLC vs. S-Corp

Option 1: Sole proprietor

What it is: The default. If you have clients or customers paying you money, you are a sole proprietor by default.

Pros

• Setup is free. There's nothing to file or renew.
• Simplest possible tax filing; Schedule C and Schedule SE with your 1040.
• No separate business tax return, no payroll, no annual report.
• You can use a DBA ("doing business as") to trade under a business name without forming anything.
• No state franchise tax or entity-level fee.
• Easy to abandon or change. Nothing to dissolve.

Cons

• No liability separation. A business debt or judgment can reach your personal assets, including savings, car, and in some circumstances, your home.
• Some clients, especially larger companies and agencies, require a registered entity before they'll sign and therefore won't work with sole proprietors.
• No entity name protection in your state.
• Business credit is essentially inseparable from your personal credit.

When it genuinely makes sense

• You're starting out, or freelancing part-time alongside a job.
• Your work is low-risk: You write, design, consult, or advise, and a mistake produces a disappointed client rather than injury or major financial loss.
• You have no employees or subcontractors.
• No client contract requires an entity.
• You carry professional liability insurance, which handles more of your actual risk than an entity does.

Plenty of self employed individuals earning well into six figures operate as sole proprietors and are fine.

Option 2: LLC with default tax treatment

What it is: A limited liability company formed under state law, taxed exactly like a sole proprietorship (single-member) or partnership (multi-member).

Pros

• Liability separation between business and personal assets, when properly maintained.
• Satisfies clients and platforms that require a registered entity.
• Reserves your business name in your state.
• It's the platform for an S-corp election later. You can form the LLC now and elect S-corp treatment in a future year when the math works. You don't have to decide both at once.
• Multi-member LLCs get a written operating agreement, which is genuinely useful if you have a partner.
• Cleaner separation for bookkeeping, which makes a business bank account and business credit easier.

Cons

• Zero federal tax benefit on its own.
• Costs money: formation fees, annual reports, registered agent, and in some states a franchise tax or gross-receipts fee whether or not you profit.
• The protection is conditional. You MUST keep business and personal finances separate.
• More paperwork to maintain, and penalties in some states for missing an annual report.
• Doesn't protect against your own professional mistakes (the next section covers this).
• Registering in a state where you don’t operate ("Delaware for the prestige") usually means registering as a foreign entity in your home state too, doubling the cost for no benefit.

When it genuinely makes sense

• A client contract requires it.
• You have real liability exposure: you hire subcontractors, work on client premises, handle sensitive data, ship a physical product, or your errors could cause significant financial loss.
• You have a business partner and want the ownership terms documented.
• Your income is approaching the range where an S-corp election might pay off, and you want the structure in place.
• Your state's cost is low and the separation is worth it to you for peace of mind.

Does an LLC actually protect you from being sued?

Anyone can sue you regardless of your entity. An LLC doesn't prevent lawsuits. What it can do is limit which assets are available to satisfy a judgment.

What an LLC generally does protect against:
(However, this is not a complete list and is not legal advice.)

• Business contract disputes and business debts, where the LLC is the contracting party
• Claims arising from an employee's or subcontractor's conduct
• Business credit obligations you haven't personally guaranteed

What an LLC generally does NOT protect against:
(But not limited to the below. Not legal advice.)

• Your own professional negligence. This is the big one. If you're a designer, developer, consultant, writer, or advisor and your work causes a client a loss, you can be sued personally for your own conduct. The LLC doesn't stand between you and your own mistake.
• Debts you personally guarantee. This includes most small business loans, credit lines, and commercial leases.
• Unpaid payroll taxes. Trust fund taxes withheld from employees carry personal liability for responsible persons.
• Fraud or intentional wrongdoing.
• Claims where the separation wasn't maintained. If you pay personal expenses from the business account, don't keep records, or treat the LLC as a pocket, a court may disregard it (commonly called piercing the veil).

What actually handles a self employed individual’s real risk

For most solo self employed individuals, the exposures that would genuinely hurt are professional mistakes and contract disputes, and the LLC addresses neither well. The tools that do:

• Professional liability insurance (errors and omissions). This is the direct answer to "what if I mess up a client project." It’s usually inexpensive for low-risk service work and it’s what an LLC is often mistakenly bought to do.
• Contract terms. A limitation-of-liability clause capping your exposure at fees paid, a mutual indemnification clause, and a clear scope of work do more practical protection than an entity.
• General liability insurance. If you visit client sites or host clients.
• Cyber liability. If you handle client data.
• Actually maintaining separation if you do form an LLC: separate bank account, no personal spending from it, documented owner draws.

None of this means don't form an LLC. It means form it for the right reason, and don't let it substitute for insurance and decent contracts.

Does your LLC need to file a BOI report? (2026: No)

Short answer: if your LLC is a US company, no. You have nothing to file.

This one confused a lot of people for two years, and much of the content still online is out of date.

What happened. The Corporate Transparency Act required most small entities to report beneficial ownership information to FinCEN, with filings starting in January 2024. After extensive litigation, FinCEN issued an interim final rule on March 26, 2025 redefining "reporting company" to cover only foreign entities. Then on August 11, 2026, FinCEN issued a final rule permanently removing the requirement for US companies and US persons to report.

Where that leaves you:

• US-formed LLCs and corporations: exempt. No BOI filing, no update obligation, no deadline to watch.
• US persons: exempt from being reported as beneficial owners. FinCEN has said it will delete previously reported US-person information from its database.
• Foreign entities registered to do business in the US: still required to report beneficial ownership information for foreign individuals.
• If you filed a BOI report during the window when it was required, you don't need to do anything now.

Two things to still check:

1. Your state may have its own version. A handful of states have enacted or proposed beneficial-ownership disclosure laws that operate independently of the federal rule.
2. Be skeptical of BOI filing services. Companies charged fees to file these reports, and some continued marketing the service after the requirement lapsed. There is no federal filing fee, because there is no federal filing.

If you see a letter or email demanding a BOI filing fee with a deadline, treat it as a solicitation, not a government notice.

Option 3: S-corp election

What it is: A tax election, filed on Form 2553, available to an LLC or a corporation. It changes how your business profit is taxed, but doesn't change your legal structure.

How the tax saving works. As a sole proprietor, essentially all your net profit is subject to 15.3% self-employment tax. With an S-corp election, you become an employee of your own business. You pay yourself a reasonable salary, which carries payroll taxes at the same combined 15.3%. Remaining profit is distributed to you and is not subject to self-employment or payroll tax.

The saving is the payroll tax you avoid on the distribution portion.

Pros

• Real self-employment tax savings once profit is high enough relative to your reasonable salary.
• You become a W-2 employee of your business, which can simplify mortgage applications and some benefit arrangements.
• Access to certain retirement plan structures with an employer-contribution side.
• Run health insurance premiums through the business, subject to specific rules for shareholder-employees.
• Distributions aren't subject to payroll tax, so income above your salary is taxed more lightly.

Cons

• You must run actual payroll, with withholding, quarterly employment tax returns, and a W-2. That means you must have a payroll provider.
• A separate business tax return (Form 1120-S) is required, which costs meaningfully more to prepare.
• "Reasonable compensation" is a real IRS requirement, not a number you pick. The IRS can reclassify distributions as wages, with back taxes and penalties. Its stated factors include your training and experience, duties, time devoted to the business, what you’d pay someone else to do the work, and industry norms.
• It shrinks your QBI deduction. Reasonable compensation from an S-corp is explicitly not qualified business income. Every dollar you shift from distribution to salary reduces the profit eligible for the 20% deduction. This is the factor most break-even articles ignore, and it matters a lot.
• Ongoing compliance: You may be penalized for missing a payroll deadline or a filing.
• Some states and cities don't recognize the federal S election, or impose entity-level taxes anyway.
• Harder to undo. Revoking an S election has consequences and timing rules.
• Strict eligibility: no more than 100 shareholders, no non-resident alien shareholders, one class of stock, and only certain kinds of owners.

When it genuinely makes sense

• Your net profit is comfortably above your reasonable salary, with a wide spread between them.
• Your profit is stable and predictable. Payroll is a fixed commitment.
• You're already paying for bookkeeping, so the added admin is incremental rather than new.
• You've run the actual numbers for your income and your reasonable salary, not a rule of thumb.

At what income does an S-corp actually make sense?

Here are the four components to consider:

1. Payroll tax saved: roughly 15.3% of the profit you take as distribution instead of salary. (Precisely: self-employment tax applies to 92.35% of net profit, which slightly reduces the sole-proprietor side.)
2. Administrative cost added: Payroll service, 1120-S preparation, any state entity tax. This can be realistically $1,500–$4,000 a year.
3. QBI deduction lost: 20% of the amount you convert from distribution to salary, multiplied by your marginal tax rate.
4. The Social Security wage base: For 2026, the 12.4% Social Security portion applies only to the first $184,500. Above that, only the 2.9% Medicare portion continues (plus 0.9% additional Medicare tax above $200,000 single / $250,000 married filing jointly). So the savings per dollar shrink at higher incomes.

The calculator below runs all four of these on your own numbers.