Sole proprietorship: NOT a formal business entity. If you don’t anticipate making much money your first year (<$8k), don't have any employees or independent contractors, and don’t have a lot of liability (personally AND professionally) then this option is fine as a temporary way to start.

PERSONAL LIABILITY PROTECTION: None. People could potentially come after your personal finances and assets in a lawsuit or to pay their claim if awarded. This includes checking accounts, property, vehicles, etc.

TAXES: Simple. You file your taxes with your personal 1040 tax return on a Schedule C form. This is often referred to as ‘Pass through’ taxation.

LLC (Limited Liability Company): If you’re an entrepreneur, you may as well protect your personal assets and have the added professional formality! Forming an LLC is usually quick and painless. Each state has a one time filing fee but may also have annual fees associated as well. Find your state’s fees here!

PERSONAL LIABILITY PROTECTION: Yes. An LLC helps to protect your personal assets from your business liabilities. However, it is REQUIRED that you keep your personal income/expense separate from your business’s activity through a separate bank account.

TAXES: Depends on if you are a single-member LLC or a partnership LLC. Single-member LLCs are simple and taxed like sole proprietors. They are also considered a “pass-through entity” which means that all the income and expenses from your LLC get reported on your personal income tax return as the business operator.

A Partnership LLC that has more than one member typically pays taxes like a partnership. The partnership must file a 1065 business tax return AND then each owner must pay taxes on their lawful share of the profits on their personal income tax returns. The LLC itself does not pay taxes, but it must still file a Form 1065 with the IRS. So, it’s a little more work.

S Corporation: Unnecessary unless your net income is high. Most are advised to make over $90k, however there can still be savings even under that income threshold. A tax professional can properly advise if this is a beneficial option. 

PERSONAL LIABILITY PROTECTION: Yes. You need to set up as an LLC first which grants you the same protections. Keeping business & personal financials separate is an absolute MUST.

TAXES: More complicated and therefore costly. S corps are taxed similar to an LLC, so you don’t pay personal and corporation taxes. However, S Corps do have to file a business tax return. You as the owner have to put yourself on payroll in order to pay yourself a defendable reasonable salary, and you're allowed to receive distributions from any additional profits the business may receive. This just adds a bit more complexity to your tax season because you also need to file a Form 1120S by March 15th every year. A bookkeeper or CPA is strongly recommended. The big benefit of the S Corp taxation is that an individual does not have to pay self-employment tax on your share of the business’ profits, you only have to pay self-employment taxes on your 'reasonable salary'.

Here is a great article by LLC University that lists the LLC fees for each state as of 2024. Unsure of what some of the details mean? Send me a message for more information.