LLC vs Sole Proprietorship: Which Saves More on Taxes?

Understanding Business Structures

When you're self-employed, your business structure significantly impacts how much you pay in taxes. The two most common structures for solo entrepreneurs are:

1. Sole Proprietorship: The default structure — simplest to set up, all income is personal

2. LLC (Limited Liability Company): Provides liability protection and tax flexibility

Tax Treatment Comparison

Sole Proprietorship

LLC (Default — Disregarded Entity)

LLC with S-Corp Election

When Does an LLC Save Money?

Generally, an S-Corp election becomes beneficial when:

Example Comparison

Scenario: $120,000 net income, single filer, California

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Important Considerations

1. Reasonable salary: The IRS requires S-Corp owners to pay themselves a reasonable salary

2. Payroll costs: You'll need to run payroll, which costs $500-$1,500/year

3. State requirements: Some states charge additional LLC fees (e.g., California's $800 minimum franchise tax)

4. Complexity: S-Corp election adds paperwork and compliance requirements