Choosing the Right Business Structure: Don’t Leave Money (or Protection) on the Table
So, you started a business. Awesome! You’re making money, gaining clients, and things are moving in the right direction. But now you’re wondering:
“Should I stay a sole proprietor, or is it time to form an LLC?”
“Will an LLC save me money on taxes?”
“Do I actually need legal protection, or is that just for “big” businesses?”
At Insogna CPA, a trusted Austin, Texas CPA firm, we help business owners make smart financial moves that protect their assets and keep more money in their pockets. Let’s break it all down so you can decide what’s right for you.
Sole Proprietorship vs. LLC: What’s the Difference?
Sole Proprietorship: The “Easy Start” Business Structure
- No paperwork required—just start making money!
- Simple tax filing—your business income is reported on your personal tax return (Schedule C).
- Full control—you’re the boss, no business partners to answer to.
- No legal protection—if your business gets sued, your personal assets (house, car, savings) are at risk.
- Higher self-employment taxes—you pay 3% in self-employment taxes on ALL your profit.
LLC (Limited Liability Company): More Protection, More Flexibility
- Separates personal & business assets—your personal savings and home are protected.
- Tax flexibility—choose how you’re taxed (LLC, S-Corp, or even C-Corp).
- More credibility—looks more professional to banks, investors, and clients.
- Some paperwork required—you’ll need to file with the state and possibly pay annual fees.
- Must maintain records—mixing personal and business finances can void liability protection.
Key Takeaway: A sole proprietorship is great for getting started, but an LLC offers legal protection and tax benefits—huge advantages as your business grows.
When Should You Switch from a Sole Proprietorship to an LLC?
If you’re making serious money, working with clients, or hiring employees, it’s time to think beyond a sole proprietorship.
1. You’re Making Over $50,000 a Year
Why? If your profits are growing, you could be overpaying in self-employment taxes as a sole proprietor.
As an LLC, you can elect S-Corp status, which allows you to pay yourself a salary and take distributions—cutting your self-employment tax bill significantly.
Example:
If your business profits are $100,000:
- Sole Proprietor: You owe $15,300 in self-employment tax.
- LLC taxed as an S-Corp: If you pay yourself a $50K salary, you only pay self-employment tax on that salary, saving thousands in taxes.
2. You Want to Protect Your Personal Assets
Why? Sole proprietors have zero liability protection. That means if someone sues your business, your personal assets (home, car, savings) are at risk.
An LLC creates a legal separation between your business and personal finances, limiting your liability in case of lawsuits, debts, or business losses.
Example: If a client sues over a contract dispute, they can’t go after your personal bank account if you’re an LLC.
3. You’re Hiring Employees (or Expanding)
Why? If you’re bringing on employees, securing business loans, or expanding into multiple states, an LLC is the smarter choice.
An LLC gives you more legal credibility, access to better funding, and a structure that can grow with your business.
Example: Banks and investors are more likely to fund an LLC than a sole proprietorship.
How an LLC Affects Your Taxes (And Can Save You Money!)
Switching to an LLC doesn’t automatically change how you’re taxed—but it gives you more options.
Your LLC Tax Options:
- Single-Member LLC: Taxed like a sole proprietor (Schedule C).
- Multi-Member LLC: Taxed like a partnership (Form 1065).
- LLC Taxed as an S-Corp: Can reduce self-employment taxes if your profits are high enough.
How Insogna CPA Helps:
- Determine if an S-Corp election makes sense for your business
- Help you set a reasonable salary for IRS compliance
- Ensure you’re not overpaying in taxes
Not sure which tax option is right for you? Let’s set up a tax planning session today!
Final Thoughts: Sole Proprietorship or LLC: Which One Is Right for You?
- Stick with a sole proprietorship if you’re a low-risk, part-time freelancer or side hustler making under $50K per year.
- Switch to an LLC if you want legal protection, tax flexibility, and a business structure that grows with you...
Not sure which business structure is right for you? Let’s talk. Schedule a business structure consultation with Insogna CPA today!