LLC vs S-Corp vs Sole Proprietor: Which Is Right for Your Trade Business?

This is for the plumber, electrician, painter, landscaper, or any skilled tradesperson who has heard the terms LLC, S-Corp, and sole proprietor thrown around and still isn't sure which one applies to them. The answer matters more than most people realize, because the wrong structure costs you money, exposes you to liability, and can limit how far your business grows. Let's cut through the noise.

Sole Proprietor: The Default You Probably Didn't Choose

If you started doing work under your own name without registering anything, you're a sole proprietor. It's the simplest structure because there's nothing to set up. You work, you get paid, you report the income on your personal tax return. That's it.

The problem is everything that comes with it. As a sole proprietor, you and your business are legally the same person. If a customer sues you over a job gone wrong, they're suing you personally. Your truck, your savings, your house, all of it is on the table. You also pay self-employment tax, which is 15.3 percent, on every dollar of profit. There is no structural protection, and there are no tax advantages built in.

Sole proprietor is fine for testing an idea for a few months. It's not a long-term foundation for a real trade business.

LLC: The Right First Move for Most Tradespeople

An LLC (Limited Liability Company) creates a legal wall between you and your business. If something goes wrong on a job and you get sued, the lawsuit targets the LLC, not you personally. Your personal assets stay protected as long as you maintain the separation properly (which means a separate business bank account, separate finances, and not doing anything fraudulent).

Tax-wise, a single-member LLC is taxed the same as a sole proprietor by default: all profits flow to your personal return, and you pay self-employment tax on everything. The protection is the win here, not the taxes. That said, you do get more flexibility. You can deduct legitimate business expenses before calculating your taxable income, which reduces what you owe.

An LLC costs $50 to $500 to file depending on your state, takes less than an hour to set up, and the ongoing maintenance is minimal. For most tradespeople just getting started or running a solo or small operation, this is the right call.

S-Corp: The Tax Move When You're Making Real Money

An S-Corp is not a separate business entity in the same way an LLC is. It's a tax election. You can have an LLC and elect to be taxed as an S-Corp. This is where it gets interesting for tradespeople who are clearing $60,000 to $80,000 or more in net profit per year.

Here's how it works. With an LLC taxed the standard way, you pay self-employment tax (15.3%) on every dollar of profit. With an S-Corp election, you pay yourself a reasonable salary, pay employment taxes only on that salary, and take the rest of your profit as a distribution. Distributions are not subject to self-employment tax. On $100,000 in profit, the savings can be $5,000 to $12,000 per year depending on how you structure the salary.

The catch is complexity. S-Corps require payroll, quarterly payroll tax filings, a separate business tax return (Form 1120-S), and a reasonable salary that the IRS won't flag. You'll need an accountant. The accounting fees typically run $1,500 to $3,000 per year, which eats into the savings. Below around $60,000 in net profit, the S-Corp election usually doesn't pencil out. Above that, it often does.

So Which One Is Right for You?

Just starting out or under $50K net profit: LLC

Get the legal protection, keep the structure simple, and focus on building the business. Don't spend money on S-Corp accounting complexity before you need to.

Consistently clearing $60K or more in net profit: LLC taxed as S-Corp

Talk to an accountant about making the S-Corp election. The tax savings will likely outpace the additional accounting costs, sometimes significantly.

Partners or multiple owners: LLC with a solid Operating Agreement

If you're going into business with someone else, the Operating Agreement becomes critical. It spells out who owns what, how decisions get made, and what happens if one of you wants out. Don't skip this document.

What This Is Not

This is not legal or tax advice for your specific situation. The right structure depends on your income level, your state, your family situation, and your goals. These are the frameworks most tradespeople benefit from understanding. A qualified advisor who knows your numbers can tell you exactly which option saves you the most money and protects you the best.