What Is a Sole Proprietorship?

A Sole Proprietorship is the simplest and most common form of business. In this structure:

• You are the business: There’s no legal distinction between you and the business.

• Tax simplicity: Business income and expenses are reported directly on your personal tax return (Schedule C), meaning no separate business tax return is needed.

• Full control: You make all business decisions and are solely responsible for the outcomes.

• Liability: You are personally liable for all business debts and legal actions.

Tax Implications of a Sole Proprietorship:

• Income from the business is subject to self-employment tax (Social Security and Medicare).

• You pay federal income tax based on your personal tax bracket.

• You can deduct business expenses directly from your gross income to reduce taxable income.

What Is an S-Corporation?

An S-Corporation (S-Corp) is a special tax designation for corporations or LLCs, offering certain tax benefits:

• Separate entity: Unlike a sole proprietorship, the business is legally distinct from you.

• Pass-through taxation: Like a sole proprietorship, an S-Corp avoids double taxation (where the business pays tax on income and shareholders pay tax again on dividends). Instead, profits pass through to your personal tax return.

• Potential tax savings: You can pay yourself a salary and treat remaining profits as dividends, avoiding self-employment tax on the dividend portion.

• Limited liability: You’re shielded from personal liability for business debts and lawsuits.

Tax Implications of an S-Corp:

• Your salary is subject to payroll taxes, but any additional distributions (dividends) are not.

• You must file a separate tax return for the S-Corp (Form 1120S), and you’ll receive a K-1 to report your share of profits on your personal tax return.

• Business expenses can still be deducted, but you’ll also need to follow IRS rules on reasonable compensation for your role in the business.

S-Corp vs. Sole Proprietorship: Which Is Best for Your Business?

Choose Sole Proprietorship If:

• You’re a small, one-person business with simple operations.

• You want the easiest setup and minimal ongoing paperwork.

• You’re comfortable with personal liability for business debts.

Choose S-Corp If:

• Your business is growing, and you want to save on self-employment taxes by taking some income as distributions.

• You want limited liability protection.

• You’re ready for more formal record-keeping and filing a separate business tax return.

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Tax Considerations

• Sole Proprietorship: You’ll pay self-employment tax on your entire income, which can add up if your business is profitable.

• S-Corp: You may reduce self-employment taxes by paying yourself a reasonable salary and taking the rest as distributions (not subject to self-employment tax).

By choosing the right structure, you can reduce your tax burden and protect yourself from personal liability. However, the choice depends on your specific business needs, income level, and long-term goals.

Still Not Sure Which Is Right for You? Get a Free Estimate!

Making the right decision between an S-Corp and Sole Proprietorship can save you thousands in taxes and set your business up for success. Sign up for our FREE E-Book on business structures and tax savings, or enter your gross income, expenses, and filing status below, and we’ll provide a custom estimate comparing both options.