LLC vs Sole Proprietorship: Which Saves You More on Taxes?

When you start a business in the U.S., one of the first decisions you'll face is structure: do you operate as a sole proprietorship, or form an LLC? Most people assume the LLC automatically saves on taxes. The reality is more nuanced, and understanding it can save you thousands of dollars.

What Each Structure Actually Is

Sole Proprietorship is the default for anyone running a business alone without registering a formal entity. You and the business are legally the same person. No state registration required (though you'd need a DBA if you use a name other than your own). The downside: unlimited personal liability. If your business gets sued or defaults on a debt, your personal assets are on the line.

LLC (Limited Liability Company) creates a separate legal entity that shields your personal assets from business debts and lawsuits. In Florida, registration costs $100 for the Articles of Organization plus $25 for a certified copy: $125 to start. Annual report: $138.75.

How They're Taxed (The Part That Actually Matters)

Here's what surprises most people: a single-member LLC and a sole proprietorship are taxed identically by default.

Both are "pass-through" entities, meaning income flows directly to your personal tax return. Neither pays corporate income tax.

• •Sole proprietorship: reports on Schedule C (Form 1040). Simple.
• •Single-member LLC: also reports on Schedule C by default. The IRS treats it as a "disregarded entity."
• •Multi-member LLC: files Form 1065 (partnership return) and sends a Schedule K-1 to each member.

The primary difference between a sole prop and a single-member LLC is legal protection, not taxes. Don't let anyone convince you otherwise.

Self-Employment Tax: The Hidden Hit

When you work for someone else, your employer pays half your Social Security and Medicare taxes (FICA). When you work for yourself, you pay both halves. That's the self-employment tax.

The rate: 15.3% on net profits:

• •12.4% for Social Security (on earnings up to ~$176,100 in 2025)
• •2.9% for Medicare (no cap)

Real example: $100,000 net profit → $15,300 in SE tax before you've paid a dollar of income tax.

The one upside: you can deduct half of the SE tax from your gross income, which partially offsets the cost.

The S-Corp Election: Where the Real Savings Are

This is where things get interesting. An LLC (or corporation) can elect to be taxed as an S-Corporation by filing Form 2553 with the IRS.

The mechanism: as an S-Corp, you split your income into (1) a reasonable salary and (2) distributions. Only the salary is subject to SE tax. Distributions are not.

Let's do the math on $150,000 in net profit:

• •As a sole proprietor: $150,000 × 15.3% = $22,950 in SE tax
• •As S-Corp: pay yourself an $80,000 salary → SE tax on $80,000 = $12,240. The remaining $70,000 taken as distributions → $0 SE tax.
• •Annual savings: ~$10,710

But S-Corp status comes with real costs:

• •Formal payroll (quarterly FICA deposits and filings)
• •Corporate formalities
• •Additional accounting and bookkeeping: $1,500–$3,000 per year

The math typically makes sense when your net profit consistently exceeds $80,000–$100,000 per year. Below that, the accounting costs often eat the savings.

Deductible Business Expenses

Both sole proprietors and LLC owners can deduct legitimate business expenses, which reduce net taxable income and therefore reduce both income tax and SE tax. Key categories:

• •Home office: dedicated workspace used exclusively for business
• •Vehicle mileage: 67 cents per mile (2024 rate; check 2026 at irs.gov)
• •Self-employed health insurance: 100% of premiums deductible from gross income
• •Retirement contributions: SEP IRA (up to 25% of net SE income), Solo 401(k)
• •Equipment and technology: computers, tools, cameras; Section 179 allows full deduction in year of purchase
• •Software and subscriptions: all tools used for business
• •Marketing: website, ads, content creation

A detailed breakdown of all 15 major deductions is in our small business tax deductions guide.

Quarterly Estimated Taxes

Self-employed taxpayers don't have taxes withheld automatically. You're responsible for making four estimated payments each year using Form 1040-ES:

• •April 15 (Q1)
• •June 15 (Q2)
• •September 15 (Q3)
• •January 15 of the following year (Q4)

The safe harbor rule: pay at least 90% of this year's tax liability, or 100% of last year's total tax, whichever is smaller.

If you underpay, the IRS charges approximately 8% annualized interest on the shortfall.

Side-by-Side Comparison

The Right Structure Depends on Your Numbers

If you're just starting out and earning under $50,000, the tax difference between a sole prop and LLC is minimal. Form the LLC for legal protection, but don't worry about S-Corp yet.

If you're consistently generating $100,000 or more in net profit, the S-Corp conversation is worth having with real numbers from your specific business. At VRG, we do exactly that: we calculate whether the savings justify the additional costs before recommending the switch.

Reach out at +1 786-747-7344 or through WhatsApp.

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Legal Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Tax laws change frequently. Consult a qualified tax professional before making structural decisions about your business. VRG Tax Services is a tax preparation service and does not provide legal advice.