Sole Proprietor vs LLC vs S-Corp

Dec 15

Being self-employed comes with lots of benefits and lots of...shall we say challenges? One of the biggest for me was deciding how and when it was right for me to form an LLC and why. Here I'll explain key differences and benefits between being a Sole Proprietor, a single Member LLC, and a single member S-Corp, as well as how to go about starting to set one up for yourself.

To state the obvious yet again, I am NOT a CPA or a financial/tax professional. The solutions and points discussed in the video are not intended as a complete guide, but more so an overview from someone who has been through it in order to better help you make the decision that's best for you, your business, and your family and life. Use my advice and experience as a guidepost not a rulebook, and check in with a tax professional before making a move to determine what's best.

Here’s a brief summary of what I cover in the video:

Sole Proprietor

If you make $600+/yr doing what you do, you’re on the hook for those taxes, and BY DEFAULT you’re a sole proprietor. This makes it easy, simple, and headache-free to setup.

Pros

Easy
No Extra Paperwork
Taxes are relatively simple, EVERYTHING is subject to the same taxes (Namely Self-employment taxes @ 15.3%)
No need for extra financing/banking stuff

Cons

No Tax Breaks
You = Your Business
Some ‘business-y’ elements may be more challenging

Bank accounts
Expense accounts
Bookkeeping

Who’s it right for?

Professionals Starting Out

Not your Full-Time gig
Not a significant portion of your income
You don’t need Benefits from your business (Healthcare/Retirement)

LLC, Limited Liability Company

For single-member LLCs, there isn’t much functional difference from a sole proprietor. The key difference is you have liability protection, in that your business assets (i.e. business bank accounts, business loans, business equipment, etc.) and your personal assets (i.e. personal savings accounts, your home, etc.) are made distinct. Effectively this means that should your business become LIABLE (heyyyy) for anything—in other words if you get sued for something—the proceedings cannot touch your personal assets.

For actors, VO artists, audiobook narrators, really performers in general, there may not be much added benefit to forming an LLC in and of itself.

Pros

Liability Protection
Pretty easy to setup (despite the paperwork)
Personal/Business Separation

Bank Accounts
Expense Tracking
Etc…

Business loans and stuff

Cons

No real Tax Breaks

Who’s it right for?

The Self-Employed who want more legal separation from their business.

I.e. “Don’t Sue Me”

S-Corp, or LLC with S-Corp tax status

I’m going to boil this down pretty heavily, so to understand the full breadth of what exactly the benefits of an S-Corp are, here are a couple of resources that I found helpful in determining what was right for me.

Gusto

Rocket Lawyer

Functionally for tax savings here’s how it breaks down, and it all has to do with Self-Employment tax.

For a Sole Proprietor, ALL INCOME is subject to the Self-Employment Tax. (15.3%)

For an S-Corp, income is divided into two different “pools”. First you pay yourself a salary. This comes out of a payroll service and usually amounts to between 40-60% of your annual income. This salary is subject to Self-Employment tax. The remainder of your income is not subject to the same self-employment tax.

In my research, it’s recommended that income >$40k/yr will likely benefit from S-Corp status in tax savings, but of course chat with a CPA before making any decisions for yourself and your business.