Sole Proprietor vs LLC vs S-Corp: Which Should a Contractor Be?

Last updated Sep 4, 2026Reviewed Sep 4, 2026

Most tradespeople end up in the same place: a single-member LLC, taxed exactly like a sole proprietor, with an S-corp election switched on later once the profit justifies it. The three are not three rival choices so much as three stages, and the mistake is usually to jump a stage, either by staying a sole proprietor with a crew and a truck on the road, or by electing S-corp status on a profit that cannot cover the cost of running one.

This page puts the three side by side. Each column comes from a guide already on this site: Sole prop, LLC, or S-corp: which should you be?, Should I switch my construction business to an S-corp? and When do I pay my taxes if I'm self-employed?. Read the guide for the detail; use this page to see the shape of the decision in one look.

Two things hold across all three columns. Whichever you are, the IRS wants tax on your profit as you earn it, in four estimated payments a year, and a set-aside of roughly a quarter to a third of profit is the working figure. And forming an LLC does not change your tax bill on its own: it changes what a lawsuit can reach.

At a glance

Provider	Liability shield	Tax on profit	Payroll required	Running cost	Makes sense when
Sole proprietor	None. You are the business.	Schedule C, 15.3% self-employment tax on all of it	No	Nothing to file	Side work, first months, nothing to protect
Single-member LLC	Yes, for your personal assets	Same as a sole proprietor: Schedule C, 15.3% self-employment tax	No	A modest formation fee; a small annual fee in some states	From the first real customer
LLC taxed as an S-corp	Yes, it is still the LLC	Reasonable W-2 salary carries the 15.3%; distributions above it do not	Yes, every pay period	Roughly $1,400 to $3,800 a year	Net profit above about $70,000 to $80,000

Provider details

Sole proprietor

Best for: Side work, the first months, no crew and nothing yet to protect

Pros

Nothing to form and nothing to file beyond your own tax return
Simplest possible bookkeeping: one Schedule C
No annual fees or state filings

Cons

You and the business are the same thing: a lawsuit or a debt reaches your home, truck and savings
No way to separate business risk from personal risk
Same 15.3% self-employment tax on every dollar of profit

Single-member LLC

Best for: Most tradespeople, from the first real customer onwards

Pros

Protects your personal assets from business lawsuits and debts, if you keep the two separate
Taxed exactly like a sole proprietor, so nothing gets harder at tax time
The structure the S-corp election is later switched on top of

Cons

Does not lower your tax bill on its own
A formation fee, and in some states a small annual fee
The shield only holds if you actually keep business and personal money apart

LLC taxed as an S-corp

Best for: An established business with net profit above about $70,000 to $80,000 a year

Pros

Distributions above your salary escape the 15.3% payroll tax, which is several thousand dollars on a good year
Still your LLC underneath, so the liability shield stays
A one-form election (IRS Form 2553), not a new company

Cons

You must run payroll and pay yourself a reasonable salary first; a token salary does not survive the IRS
Roughly $1,400 to $3,800 a year in payroll, a corporate return and a CPA who knows the mechanics
Below the profit threshold the running cost eats the saving

Our pick

The order most tradespeople go through it

Start: sole proprietor, for as long as there is nothing to protect

Nothing to file and nothing to run. The cost is that you and the business are the same thing, so a lawsuit or a debt reaches your home, truck and savings. That is tolerable for side work and the first few months. It stops being tolerable the day you have a customer's house to answer for.

Then: a single-member LLC, from the first real customer

The tax picture does not move at all: same Schedule C, same 15.3% self-employment tax on the profit. What you buy is the liability shield for your personal assets, for a modest one-time formation fee and, in some states, a small annual fee. Form it in the state you actually work in; a "cheap" state elsewhere means registering as a foreign LLC at home anyway and paying two sets of fees.

Later: the S-corp election, once profit clears about $70,000 to $80,000

The S-corp is a tax election on top of the LLC you already have (IRS Form 2553), not a different company. You pay yourself a reasonable W-2 salary, which carries the full 15.3% payroll tax, and take the rest as distributions, which do not. The saving is real on a good year, and it is eaten below the threshold by the cost of running it: payroll, a separate corporate return and a CPA who knows the mechanics, roughly $1,400 to $3,800 a year. The IRS will not accept a token salary, so "reasonable" means what your trade pays for your role in your area.

What does not change at any stage

Quarterly estimated payments, and the set-aside behind them. Run the figure on the Tax Set-Aside Calculator, then read the guide that matches the stage you are at.

Sources

IRS - Business structures · What each structure is for federal tax purposes, and that the choice decides which return you file
IRS - S corporations · The S-corp election, the reasonable-compensation requirement, and the split between salary and distributions
IRS - Estimated Taxes · Four estimated payments a year, whichever structure you use

SiteKiln does not receive referral fees, affiliate commission or kickbacks from any provider listed. This is editorial content. If a better option exists, tell us at hello@kilnguides.co.uk.

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