LLC vs sole proprietor vs S-corp: 2026 guide for solo owners

A sole proprietorship is the default, an LLC protects your personal assets, and an S-corp is a tax election you can make for an LLC once your profit is high enough. The three aren't rivals on one shelf. They stack, in that order, as your income grows. This guide covers the US rules for 2026. It's general information, so check your numbers with a CPA before you file anything.

What each structure actually is

A sole proprietorship is what you are the moment you take money for work and do nothing else. There's no filing, no separate entity and no line between you and the business.

An LLC is a legal entity you register with your state. Its purpose is to put a wall between the business's debts and your personal assets.

An S-corp isn't an entity type at all. It's a tax election that an LLC or corporation makes by filing IRS Form 2553. You form the LLC first, then choose to have it taxed as an S-corp if the numbers justify it. The election has a deadline: for a calendar-year business, you generally have to file within two months and 15 days of the start of the tax year, which lands on March 15 (IRS, Instructions for Form 2553). Miss it and you usually wait until next year, unless the IRS grants late-election relief.

Liability: who pays when something goes wrong

As a sole proprietor, you can be held personally liable for the debts and obligations of the business, according to the Small Business Administration (SBA, Choose a business structure). Your savings, car and home are exposed if a client sues or the business can't pay a bill.

The SBA describes an LLC as protecting your personal assets in most instances, such as your car, house and savings, if the LLC faces bankruptcy or lawsuits. That protection is the main reason to form one, and it has nothing to do with your tax bill.

It isn't absolute. It depends on keeping the business genuinely separate. Use a dedicated bank account, don't mix personal and business money, and sign contracts in the business name. If you treat the LLC like a costume you put on and take off, a court can ignore it. If your work can cost a client real money when it goes wrong, such as design, development, consulting or anything with deliverables, the wall is worth having. Insurance is a separate question and sometimes a better fit than structure alone.

Self-employment tax: the number that drives the decision

Self-employment tax is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare (IRS, Self-employment tax). It sits on top of income tax and applies to your net profit. For tax purposes, a single-member LLC taxed the default way is treated like a sole proprietor, so forming the LLC doesn't change this tax at all.

The Social Security part only applies up to a yearly cap. For 2026 the wage base is $184,500, up from $176,100 in 2025 (Payroll Org, citing the SSA). The Medicare part has no cap and applies to every dollar of profit. You can deduct part of your self-employment tax when you calculate adjusted gross income, which softens the blow but doesn't remove it.

If you also work from home, the home office deduction is one of the few deductions that applies to every structure, so check it before deciding the structure alone will fix your tax bill.

The QBI deduction is now permanent

The qualified business income deduction, also called Section 199A, lets eligible owners of pass-through businesses deduct up to 20% of their qualified business income (IRS, QBI deduction). Sole proprietors, LLC owners and S-corp shareholders can all claim it. For a solo owner with $80,000 of qualifying income, a full 20% deduction removes $16,000 from taxable income before income tax is calculated.

The deduction was set to expire after 2025, and the One Big Beautiful Bill Act made it permanent. RSM's summary says the income range over which limits phase in widened to $75,000 for single filers and $150,000 for joint filers, and that there is now a minimum deduction of $400 for owners with at least $1,000 of active qualified business income (RSM). More owners can now keep the full deduction.

There's a wrinkle for the S-corp decision. Salary you pay yourself from an S-corp is a wage, and wages aren't qualified business income. A larger salary can shrink your QBI deduction even as it satisfies the IRS. The two pull against each other, which is why the salary figure isn't a guess.

The S-corp salary and distribution split

This is the only reason most solo owners ever consider an S-corp. When your LLC is taxed as an S-corp, you split profit into a salary you pay yourself as an employee and the rest taken as distributions. The salary carries payroll tax. The distributions don't carry self-employment tax. That gap is the saving.

The catch is the word "reasonable." The IRS says S corporations must pay reasonable compensation to a shareholder-employee for the services they provide before non-wage distributions can be made (IRS, S corporation compensation). Pay yourself $10,000 on $150,000 of profit and the IRS can recharacterize distributions as wages, then add tax, penalties and interest.

An illustration, with simplified arithmetic. Say you net $120,000. As a sole proprietor, almost all of it faces self-employment tax. As an S-corp you might pay yourself a defensible $70,000 salary and take $50,000 as distributions. The 15.3% you skip on $50,000 is about $7,650. That's before the cost of payroll software, extra tax filings and a CPA, which is why the election doesn't pay off at lower profit.

What each structure costs in paperwork

A sole proprietorship adds nothing to your filing beyond a Schedule C with your personal return. There's no state registration and no annual report, though a separate bank account is still a good idea.

An LLC costs a state filing fee to form, and the amount varies a lot by state. Many states also charge an annual report fee or a franchise tax, so check your own state's rules. A single-member LLC still files a Schedule C, so most of the extra work is state upkeep.

An S-corp is a real commitment. You run payroll for yourself, file quarterly payroll forms and issue a W-2. You also file a separate business return, Form 1120-S, on top of your personal return. For most people that means paying an accountant for both, and the extra compliance cost is the main reason the election only pays off above a certain profit.

When each one starts to make sense

Stay a sole proprietor while you're testing whether the business sticks, your income is small and unpredictable, and the risk of a claim is low. Rushing into an LLC doesn't save tax.

Form an LLC when you have real clients, real contracts and real assets to protect, or when a client expects you to be a registered entity. Liability is the driver. Many solo owners cross this line in their first or second profitable year.

Consider the S-corp election when your net profit is high enough that the self-employment tax you'd skip on distributions clearly beats the cost of payroll and a CPA. There's no single threshold, and any rule of thumb you hear online is a place to start the math, not a finish line. Ask a CPA to model your actual income, your state's rules and the effect on your QBI deduction before you file.

Plan any switch around your estimated-tax schedule. Quarterly payments change when your structure changes, so mid-quarter switches are messy. If you're also trying to understand how bank reporting works, our guide to the 1099-K threshold in 2026 covers what payment platforms send to the IRS.

How Delivvo helps once you have a business entity

Once you register a business, your client-facing documents should show it. Delivvo lets you put your business identity on every quote, contract and invoice, so the paperwork matches the structure you chose.

1. Add your business name, address and your tax or registration number to your profile, plus your logo and colour. They appear on the portal, forms, quotes, emails and PDFs.
2. Set your invoice numbering. Invoices get sequential numbers in the format you choose, and you can void an invoice or issue a credit note instead of deleting it, so your records stay in order.
3. Send contracts for signature from the same place. Signing leaves a record with a SHA-256 fingerprint, the IP address, the device and an archived PDF.
4. Split a larger job into a payment schedule of up to 12 payments, with a deposit first.
5. Every invoice, receipt, contract and quote carries a verification code. Your client's accountant can check it on the Delivvo verify page.

Invoices use the Tax Invoice title and support options such as reverse charge, but tax rules differ by country and by your registration status. Delivvo gives you the structure and the records. Your accountant decides what each document has to say. Clients pay you directly through your own gateway, and Delivvo takes 0% of the payment, so your income goes through your own accounts. That matters when you need clean books for a CPA or for the separate business bank account an LLC requires.

Read how it works on the invoices and tax page.

For the wider picture, see Delivvo for teams and the CRM for service businesses.

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