S Corp vs. Sole Proprietor: What Makes Sense for Your Business?

Big Picture—Why Entity Choice Matters

Think of your business structure as the frame of a house: pick the right one and everything else (taxes, liability, even how legit you look to banks) sits on a solid foundation. Two of the simplest “frames” for service-based owners are:

• Sole Proprietorship – set-up-in-a-day simple, but every dime of profit gets hit with self-employment tax and your personal assets stay on the hook.

• S Corporation (a.k.a. “S Corp”) – paperwork-heavy at first, but it can slice thousands off your payroll taxes and add a protective corporate “shell.”

How They Differ—In Plain English

🚀 Quick Hit	Sole Proprietor	S Corp
Start-Up Effort	Grab a business license and go.	Form an LLC or corporation plus file IRS Form 2553.
How You’re Taxed	All profit lands on Schedule C of your 1040.	Profits “flow through” to your personal return via a K-1.
Payroll / SE Tax	15.3 % on every dollar of net profit.	15.3 % only on the W-2 salary you pay yourself. Distributions skip SE tax.
Liability Shield	None. If you’re sued, you’re on the line.	Corporate veil can protect your home and bank account (if you follow the rules).
Ongoing Chores	Lowest. No separate business return.	Payroll, quarterly deposits, Form 1120-S, state fees.
Sweet Spot	Side hustles & early-stage gigs.	Consistent profits of $60-80 k+ and up.

Let’s Put Some Numbers on It - How an S-Corp Can Save

Assume $150,000 in net profit.

Scenario	Amount Hit by 15.3 % Tax	Payroll/SE Tax You Pay
Sole Proprietor	$150,000	$22,950
S Corp (with a $70k salary)	$70,000	$10,710

👉 Potential savings: about $12,000—before payroll service and filing fees.

Five Fast Questions to Find Your Best Fit

1. Profit Level: Do you clear at least $60 k after expenses? If yes, an S Corp usually wins.

2. Paperwork Tolerance: Comfortable adding payroll runs and an extra tax return?

3. Asset Protection: Would a lawsuit put your personal savings at risk?

4. Perks & Benefits: Want to max a Solo 401(k) or deduct health insurance? S Corps make that easier.

5. Growth Plans: Lenders and investors often trust incorporated businesses more.

FAQ—Rapid-Fire Edition

What’s a “reasonable salary”?

Market rate for the work you actually do. If you’d pay a manager $70 k to handle your duties, that’s your floor.

Can I switch later?

Absolutely. Many owners start as sole props, then elect S status once profits grow. File Form 2553 within 75 days of the target start date (or anytime in the prior tax year).

Do I have to give employees the same benefits?

Only certain benefits must be nondiscriminatory. You can still pick and choose perks—as long as you follow the rules.

What about state taxes?

Some states charge extra entity or franchise taxes. We always run the math to be sure the S Corp still saves you money.

Bottom Line

If your business is bringing in healthy, predictable profits and you’re cool with a bit more admin, an S Corp can mean thousands in payroll-tax savings plus a liability shield. Still ramping up or testing the waters? Keep it simple with a sole proprietorship—for now.

Next Step—Crunch the Numbers With Us

We specialize in guiding solo entreprenaurs and service-based businesses through the entity-choice maze. Book your free strategy call and see exactly how much you could save.

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