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S-Corp vs. LLC vs. Sole Prop: A Plain-English Comparison

Entity choice affects taxes, liability, payroll, and paperwork. Here’s a simple, practical comparison to help you talk options with your advisor.

Wednesday, Nov. 25 | 2 min read

Quick definitions (plain English)

  • Sole proprietorship: You are the business. Easiest to start, simplest records.

  • LLC (limited liability company): Legal wrapper that can protect personal assets; flexible tax options.

  • S-Corporation (S-Corp): A tax election (often for an LLC or corporation) with pass-through treatment and payroll requirements for owners.

Liability & legal

  • Sole prop: No separation—personal assets generally at risk.

  • LLC: Liability protection if you respect formalities (separate accounts, contracts, minutes as needed).

  • S-Corp: Liability protection comes from the underlying entity (often an LLC taxed as S-Corp).

Taxes (high level)

  • Sole prop: Net profit subject to income tax and self-employment tax.

  • LLC: By default similar to sole prop (single-member) or partnership (multi-member); can elect S-Corp.

  • S-Corp: Owners who work in the business must take reasonable compensation via payroll; remaining profit typically passes through without self-employment tax.

Admin & cost

  • Sole prop: Minimal filings; simplest bookkeeping.

  • LLC: Formation fees, annual reports (varies by state).

  • S-Corp: Payroll setup, officer wages, extra filings (e.g., information return), more formal bookkeeping.

When each often fits

  • Sole prop: Testing a concept, side gigs, very small scale.

  • LLC (default tax): Need liability protection; profits modest; flexibility valued.

  • LLC taxed as S-Corp: Stable profits where payroll for owner-operators makes sense and the admin burden is acceptable.

Pitfalls to avoid

  • Mixing personal and business funds (pierces liability shield).

  • Ignoring reasonable compensation in S-Corps.

  • Missing state-level fees or franchise taxes.

  • Electing S-Corp too early (volatile profits) or too late (missed tax planning window).

Decision framework (3 questions)

  1. Do you need liability protection now?

  2. Are profits stable enough to justify payroll/admin?

  3. Do state fees and compliance offset expected tax benefits?

How KKA can help

We model after-tax cash flow under each option and map the setup steps, filings, and payroll requirements.

Disclaimer: This is general education, not legal or tax advice. Entity decisions should reflect your state law and facts.