Sole Proprietorship vs. S Corp

For many entrepreneurs, the business formation option comes down to sole proprietorship vs. S corp. Sole proprietorships offer an easy way to get a business started but provide no protection for personal assets. In contrast, choosing an S Corp can protect business owners’ personal finances and lead to significant tax savings in the future. So, how exactly does this work, is the sole proprietorship the same as S corp, and how do entrepreneurs choose the right option?

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What Is a Sole Proprietorship?

Sole proprietorships make up the bulk of businesses in America. Freelancers, independent contractors and sole practitioners generally fall into this category. This unincorporated business structure provides no separation of the business from the individual owner.

While this facilitates a much easier way to get a business started, it exposes owners to greater levels of risk. If the business goes under, the owner could lose personal assets to cover the cost of defaulted loans, lawsuits or other expenses. Sole proprietors may also lose their business assets to personal debts.

What Is an S Corp?

Owners of LLCs and corporations can elect for a taxation status known as S Corp. Because only incorporated businesses can elect for S Corp treatment, business owners enjoy the separation of personal and business assets and debts.

When business owners choose this option, it treats the owner as an owner-employee, which may reduce tax liabilities by avoiding double taxation. Business owners should work closely with financial professionals to determine the best compensation structure for reducing taxable incomes.

What Are the Differences Between a Sole Proprietorship and an S corp?

It’s easy to determine key differences in the definitions of sole proprietorship vs S Corp. Still, let’s take a closer look.


When creating their businesses, owners have the option to make them separate legal entities. When business owners opt for a sole proprietorship, the business is not a separate entity. Instead, government agencies, creditors and other key parties treat the business and its owner as one and the same. This results in no liability protection.

S Corps maintain their status as separate legal entities. Consequently, they can own property, owe debts and execute transactions in their own names. Should the business fail, only its assets would face risk.


Sole proprietors enjoy pass-through taxation. In this arrangement, they pay self-employment tax and income tax on net profits. Put simply, the business profit passes through to the individual owner’s tax return as income. 

When owners elect for S Corp tax status, owner-employees enjoy some degree of pass-through taxation. They pay income taxes and FICA taxes on their reasonable salaries. However, they only pay income tax on distributions from earnings.


Most sole proprietors do business under their existing names. This is especially likely for freelancers, independent contractors and micro-business owners. However, some states might require filing a DBA for the use of a fictitious name or a separate business name.

The naming conventions for LLCs and corporations differ across state lines and professions. Some of the most highly regulated industries include law, medicine and finance. For the most part, business owners can name their businesses after themselves, but may also need to include the LLC designation or a profession-specific equivalent, as per state law.


One of the main reasons people first gravitate toward sole proprietorships is the low barrier to entry. It costs virtually nothing in time and money and they can get started almost immediately. Of course, some industries might require licenses, but so do S Corps, and the initial cost amounts to much less.

LLCs and corporations do require upfront fees for creation. The specific fees vary across state lines and industries. For example, registering a business corporation in Georgia costs only $50. However, the IRS charges companies nothing for EIN applications. From a long-term perspective, the initial investment can save owners thousands to even millions down the line.


Sole proprietors could go from working for someone else to operating their own business on the same day. It would take very little, if anything at all, to transition from employee to sole proprietor. They can even use their personal accounts for business transactions.

When business owners create LLCs or corporations, it introduces some new complexities to preserve separation. Generally speaking, they will need to open a business account. They will also need to determine the assets owned by them vs their businesses.


Sole proprietors have one owner who often does the majority of the work for the business. If sole proprietors choose to hire employees, this is the point when getting an EIN becomes necessary. While they certainly can expand operations, each new person intensifies risk significantly. Accepting investments also creates general partnerships, which have a 70% failure rate.

LLCs and corporations are much easier to scale up and down. Consider these factors:

  • It is often easier to attract investors without transitioning into a partnership. 
  • Corporations can go public at any time.
  • Investors tend to see corporations as safer investments because of the separation of assets.
  • Managers can hire workers immediately.


Sole proprietors have full control over their businesses. They make all the decisions and have no legal obligation to discuss anything with anyone. There are no formal documents governing business or operations unless they choose to create one.

LLC owners might enjoy a similar level of freedom for single-member LLCs. However, they still generally need to file articles of incorporation, they may need to identify an organizer and some states require operational agreements.

In What Ways Is a Sole Proprietorship the Same as S Corp?

Ironically, the taxes serve as common ground between both types. As established earlier, both enjoy pass-through taxation. Another similarity between sole proprietorships and S corps comes around during the tax-filing season.

Because the IRS treats them as one entity, sole proprietors only need to file one tax return for themselves and their businesses. Single-member LLCs can also file one tax return. To report business activity in this manner, small business owners fill out Schedule C and attach it to their tax returns.

Excellent bookkeeping is also crucial for both types of business structures. Both business types need this for tax purposes and to determine profitability.

Sole Proprietorship vs. S Corp - How Do Entrepreneurs Choose the Right Option?

Most finance gurus and business consultants agree that all business owners should seek to incorporate their businesses. However, preferences and unique situations might dictate otherwise.


How much risk are entrepreneurs willing to shoulder for their businesses? If they are young and have very few assets, they have little to lose and a lot of time to recover. In this instance, a sole proprietorship might not seem like a bad idea.

However, if they have accumulated assets or if they are approaching retirement, this is not the time to take on risk. Not only should they consider S Corps, but they should also look into insurance after setting up the business. Smart business owners in high-risk fields also choose incorporation. Here are some examples:

  • Health care
  • Construction
  • Real estate
  • Law
  • Food
  • Sports


Some entrepreneurs try their hands at various business ideas before finding the one that works for them. If they intend to bounce around various ideas, just getting started and going for it might be a good idea.

However, once they have established business operations, they should consider transitioning to S Corps. If they have multiple related ideas that work well, they may complete DBAs for each one and operate them together under one incorporated business.

Business Credit

Most businesses could use a little extra money to cover working capital or to expand. There are far fewer opportunities for sole proprietors. Banks also often set much lower limits or might charge higher interest rates to reflect higher risk caused by a lack of asset separation.

In contrast, LLCs have a much easier time building business credit and attracting loans for expansion and operations. Business credit cards, business lines of credit and business loans are just some of the many opportunities that become easier to secure.


When it comes to establishing professional reputations, the type of business structure can make a difference. Because sole proprietorships are usually associated with newcomers and a lack of commitment, this might attract less credibility.

Even though virtually anyone can form an LLC, consumers and the general public tend to view them as more permanent. Consequently, creating an LLC can significantly boost the credibility of a business. This is especially important for services, such as consultancy.

How Do Entrepreneurs Complete the Related Paperwork?

Some entrepreneurs have the knowledge and experience to tackle business formation on their own. Maybe they have opened other businesses before or maybe they are business law attorneys. Unless they have a legal background, though, going it alone can lead to poor strategic decisions that resurface down the road.

Hiring an attorney is arguably the best solution, but attorneys are expensive to work with. According to one Forbes article, startups often spend as much as $800 per hour on legal fees. When entrepreneurs have a tight budget, fees like this could eat right through it in no time.

Consequently, companies all across the internet provide business formation packages at more reasonable prices. Then, there are companies like ours that provide these services at no cost. Instead, we make money from paid partnerships with other businesses, while offering this free service. Consequently, entrepreneurs pay only for fees mandated by local, state and federal governments.

Comparing sole proprietorship vs S corp leaves you with several options. Whether you plan to formalize your sole proprietorship, create an LLC, form a corporation or elect S Corp tax status, we can help. Are you ready to get started?

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