LLC, S-Corp, or Sole Proprietor: What’s Best for Your Taxes?

Starting a business is exciting—until tax season rolls around. Choosing the right business structure can make a huge difference in how much you keep versus how much goes to the IRS. Whether you’re a freelancer, small business owner, or scaling startup, understanding your tax options early can save you serious money. A trusted tax consultant company in Fort Mill SC like Carolina Tax Consulting can help you navigate these decisions with clarity and confidence.

In this post, you’ll learn how LLCs, S-Corps, and sole proprietorships differ for tax purposes and how a tax planning professional can help you pick the structure that maximizes your earnings and minimizes your stress.

1. Sole Proprietorship: Simple but Risky

If you’re just starting out, becoming a sole proprietor is the easiest route. There’s no separate legal entity—your business and personal income are one and the same.

Tax benefits:

• You file your business income on your personal return using Schedule C.
• No corporate tax filings required.
• You can deduct business expenses directly, including supplies, home office, and mileage.

Downsides:

• You’re personally liable for all business debts and legal issues.
• You pay self-employment tax (Social Security and Medicare) on all profits.
• Limited options for growth or bringing on partners.

This setup is great for freelancers or side hustlers who aren’t ready to incorporate, but the lack of liability protection can become a problem as income grows.

2. LLC: The Flexible Middle Ground

A Limited Liability Company (LLC) strikes a balance between simplicity and protection. It shields your personal assets from business liabilities and offers flexible tax treatment.

Key tax points:

• By default, a single-member LLC is taxed like a sole proprietor.
• You can elect to be taxed as an S-Corp or even a C-Corp for potential savings.
• Business expenses are deductible, and you can pay yourself through distributions or salary depending on your setup.

Pros:

• Legal protection from business debts.
• Easy to form and maintain.
• Freedom to choose your tax classification later.

Cons:

• You still owe self-employment taxes unless you elect S-Corp status.
• Additional state filing fees and annual reports.

For many small businesses, LLCs offer the best mix of protection and flexibility, especially as income grows beyond a few thousand dollars a month.

3. S-Corporation: Tax Efficiency for the Growing Business

Once your profits start to climb, an S-Corp can reduce your tax burden. It allows owners to receive a “reasonable salary” while taking additional profits as dividends, which are not subject to self-employment tax.

Tax advantages:

• You only pay payroll taxes on your salary, not the entire profit.
• Pass-through taxation—profits go to your personal return, avoiding double taxation.
• Easier to attract investors or add partners than a sole proprietorship.

Potential downsides:

• Requires running payroll and filing additional IRS forms.
• The IRS scrutinizes “reasonable salary” levels.
• Stricter compliance rules than LLCs.

S-Corp status is ideal for owners making steady profits who want to cut self-employment taxes while staying compliant.

Case Study: How One Business Owner Saved Thousands

Jessica, a freelance designer earning $90,000 annually, was operating as a sole proprietor. Her self-employment taxes were eating up her profits. After consulting with Carolina Tax Consulting, she transitioned her business to an LLC taxed as an S-Corp. By paying herself a $50,000 salary and taking $40,000 as dividends, she reduced her self-employment taxes by nearly $6,000 in the first year.

4. Which One Should You Choose?

Here’s a quick rule of thumb:

• Sole Proprietor: Best for side gigs or small-scale freelancers.
• LLC: Best for small business owners wanting legal protection and flexibility.
• S-Corp: Best for established businesses seeking tax efficiency and growth potential.

Ultimately, the “best” choice depends on your income, goals, and how you plan to grow. An experienced consultant can evaluate your numbers and handle the paperwork while you focus on running your business.

Final Thoughts

Picking between an LLC, S-Corp, or sole proprietorship isn’t just a legal choice—it’s a financial strategy. The right structure can save you thousands and set your business up for long-term success. If you’re unsure which path to take, talk to a professional who understands both taxes and small business realities.

Your move: Schedule a consultation with Carolina Tax Consulting today and take control of your financial future before the next tax season hits.