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Choosing how to structure your business is one of the first — and most important — decisions you’ll make. It affects your personal liability, how you’re taxed, how much self-employment tax you pay, and how much paperwork you deal with. Here’s a plain-English look at the three options most small businesses weigh.
Sole Proprietor
This is the default when one person runs a business without forming a separate entity. It’s the simplest and cheapest to start, but there’s no legal separation between you and the business — your personal assets are exposed if the business is sued or owes money.
- Income and expenses are reported on Schedule C with your personal return.
- You pay self-employment (SE) tax of 15.3% (12.4% Social Security + 2.9% Medicare) on your net earnings once they reach $400 for the year.
- For 2026, the 12.4% Social Security portion applies to net earnings up to $184,500; Medicare’s 2.9% has no cap.
LLC (Limited Liability Company)
An LLC is a legal entity that generally gives you liability protection — separating your personal assets from the business. For taxes, a single-member LLC is treated like a sole proprietor by default, and a multi-member LLC like a partnership (both “pass-through,” meaning profits flow to your personal return).
- Liability protection is the main upside over a sole proprietorship.
- By default you still pay the same 15.3% SE tax on your share of the profit.
- An LLC can elect to be taxed as an S-Corp — which is where the tax planning gets interesting.
S-Corp (an election, not an entity type)
“S-Corp” is a tax election an LLC or corporation can make. Its main appeal is reducing self-employment tax: you pay yourself a reasonable salary (subject to payroll taxes), and remaining profits can be taken as distributions that generally aren’t subject to SE tax.
- Potential SE-tax savings once profits are consistently high enough to justify it.
- Trade-off: you must run payroll, file extra returns, and pay yourself a salary the IRS considers reasonable — understating it is a common audit trigger.
- More administration and cost, so it isn’t worth it for every business.
Quick comparison
| Sole Proprietor | LLC | S-Corp election | |
|---|---|---|---|
| Liability protection | No | Yes | Yes |
| Taxed as | Pass-through | Pass-through (default) | Salary + distributions |
| Self-employment tax | On all net profit | On all net profit | On salary only |
| Admin burden | Lowest | Moderate | Highest |
Many pass-through owners may also qualify for the Qualified Business Income (QBI) deduction, subject to income limits and current rules — another reason structure choice is worth a conversation.
So which should you choose?
It genuinely depends on your income, growth plans, risk, and how much administration you want to take on. The right answer for a side hustle is rarely the right answer for a growing business. We help Houston owners weigh liability, taxes, and paperwork and pick a structure that fits — and set it up correctly. See our business structure solutions and tax services, or contact us to talk it through.
Sources & disclaimer: Rates and thresholds are from the IRS self-employment tax guidance and the SSA 2026 contribution and benefit base ($184,500). This article is general information, not legal or tax advice; the right structure depends on your specific situation — confirm the details with a tax professional.