llc vs sole prop vs s-corp: a decision framework

The three structures

When you start a 1099 business, you have three main legal structures. Each offers different benefits and costs. The "best" one depends on your income, industry, and complexity tolerance.

Sole proprietorship

What it is: You, operating a business under your name (or a DBA—"doing business as"). No separate legal entity. No paperwork beyond a DBA filing (optional, and cheap).

Liability protection

None. If a client sues you, they can go after your personal assets (house, car, savings). Not great, but fine for most creators who aren't holding other people's money or operating in high-risk industries.

Taxes

You pay self-employment tax (15.3%) on all net profit. No reduction. Your business income flows directly to your Form 1040. No separate corporate tax return.

Costs

Minimal. A DBA filing (if required by your state) costs $0–$200. No ongoing fees. No payroll complexity.

Admin burden

Almost none. You file Schedule C with your personal return. That's it.

When to use

Best for beginners and creators with income under $60k/year who aren't worried about liability (e.g., a YouTuber, Patreon creator, freelance writer with no employees).

Limited liability company (LLC)

What it is: A separate legal entity you form with the state. You file articles of organization, get an EIN (free), and run your business "through" the LLC. Your personal assets are generally protected if the LLC is sued.

Liability protection

Good. If a client sues the LLC, they can recover the LLC's assets, not your personal house/car. Not perfect (courts can "pierce the veil" in some cases), but solid protection. Especially important if you have employees, contractors, or handle other people's money.

Taxes: default (pass-through)

By default, an LLC is taxed as a sole proprietorship (if single-member) or partnership (if multi-member). You pay 15.3% self-employment tax on all net profit. No separate corporate tax return.

Taxes: optional S-corp election

You can elect to be taxed as an S-corp. This is where the tax savings come in. (We'll cover this below.)

Costs

Formation: $50–$500 (filing fee varies by state). Annual: $0–$500 (some states charge yearly LLC taxes). CPA fees: $200–$500/year extra (for bookkeeping and tax returns) if you use default pass-through. More if you elect S-corp status.

Admin burden

Low to medium. You need separate business bank account and bookkeeping. If you elect S-corp, you must file a separate Form 1120-S (corporate tax return) and possibly do quarterly filings. But it's manageable with a CPA or bookkeeper.

When to use

Good for creators who want liability protection and are earning $60k+/year. Also good if you're hiring employees or contractors (cleaner for payroll). And if your income is $80k+, the S-corp election saves significant money.

S corporation

What it is: You form an LLC or C-corp, then elect to be taxed as an S-corp by filing Form 2553 with the IRS. The LLC provides liability protection; the S-corp election changes how taxes work.

Liability protection

Good. Same as LLC (if you formed an LLC). If it's a true S-corp (incorporated), even better.

Taxes

You pay yourself a "reasonable salary" (W-2), and take the rest as distributions. Self-employment tax (12.4% SS + 2.9% Medicare) applies only to the W-2 salary, not to distributions.

This is the key benefit: if you earn $80k, you might pay yourself $60k salary and take $20k distribution. SE tax only applies to the $60k, saving you ~$1,600 in SE tax annually.

Costs

Formation (LLC or C-corp): $50–$500. S-corp election: free (Form 2553). Annual costs: $500–$1,500 in CPA fees (more complex), plus payroll processing ($100–$400/year).

Admin burden

High. You must run payroll (quarterly filings, W-2 processing), file a separate Form 1120-S, track reasonableness of salary, and maintain formal records. Not for the disorganized.

When to use

Best for creators earning $80k+ in net profit. At lower incomes, the admin and accounting costs outweigh the savings. At higher incomes, savings easily exceed costs.

Head-to-head comparison

The financial math at different incomes

$40,000 net profit

Sole prop or LLC (default): $40k × 92.35% × 15.3% = $5,646 SE tax

S-corp (salary $30k, distributions $10k): $30k × 92.35% × 15.3% = $4,235 SE tax. Savings: ~$1,411, but CPA costs $500+. Net: break-even or slightly positive.

Verdict: Don't use S-corp. Sole prop or LLC is fine.

$80,000 net profit

Sole prop or LLC (default): $80k × 92.35% × 15.3% = $11,293 SE tax

S-corp (salary $60k, distributions $20k): $60k × 92.35% × 15.3% = $8,470 SE tax. Savings: ~$2,823. Minus CPA costs ($800): Net $2,000 saved.

Verdict: S-corp is worth it. Get an LLC and elect S-corp status.

$150,000 net profit

Sole prop or LLC (default): $150k × 92.35% × 15.3% = $21,176 SE tax

S-corp (salary $110k, distributions $40k): $110k × 92.35% × 15.3% = $15,522 SE tax. Savings: ~$5,654. Minus CPA costs ($1,000): Net $4,600+ saved.

Verdict: S-corp is essential. Definitely worth the admin burden.

Decision tree

Start here: What's your current income?

• Under $20k/year: Sole proprietorship. No liability risk, minimal complexity.
• $20k–$60k/year: Sole proprietorship OR LLC (default). If you want liability protection and don't mind slightly higher accounting costs, form an LLC.
• $60k–$80k/year: Form an LLC (default tax). Consider S-corp election if approaching $80k. Evaluate with a CPA.
• $80k+/year: Form an LLC and elect S-corp. The SE tax savings justify the admin burden.

Additional factors:

• Do you have employees? Use LLC or S-corp. Sole prop makes payroll messy.
• High liability risk? Use LLC or S-corp for protection. (If you handle client assets, take on clients, etc.)
• Multiple states? S-corp gets complicated. LLC is simpler. Consult a CPA.
• Do you like admin? If not, avoid S-corp unless income justifies it ($80k+).

When to change structures

From sole prop to LLC

You can switch anytime. Form an LLC, get an EIN, open a business bank account, and transition your business over. The IRS doesn't care. It's retroactive (you can file an amended 1040 if needed). Cost: $50–$500 + a few hours of paperwork.

From LLC (default) to S-corp

File Form 2553 with the IRS (election to be taxed as S-corp). It can be retroactive to the start of the tax year. Costs: nothing to file; $500–$1,000 in CPA fees to set up. Deadline: 2 months and 15 days after the start of the tax year you want it effective (or within 2 months of forming the LLC).

From S-corp back to LLC (default)

You can revoke the S-corp election if it no longer makes sense (income dropped, too much admin). File Form 2553 box C to revoke. Effective the next tax year (unless you want a specific effective date).

Bottom line

Most 1099 creators start as sole proprietors (simplest). As income grows ($60k+), forming an LLC adds liability protection. If income reaches $80k+, electing S-corp status saves thousands in self-employment taxes—but only if you're organized enough to handle payroll and annual filings.

Don't overthink it. Start simple, upgrade when the math makes sense. And always run the numbers with a CPA before making a switch—they can account for your specific situation (state taxes, other income, etc.).