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

Plumber, electrician, installer, painter, landscaper. You've heard "LLC," "S-corp," and "sole proprietor" thrown around. Here's what each one actually means for your money and your risk.

First, one thing that clears up most of the confusion: an S-corp is a tax election, not a separate kind of business. An LLC is a legal structure. You can have an LLC that's taxed as an S-corp.

Key takeaways

• Sole proprietor: no setup, no liability protection. You and the business are the same.
• LLC: legal separation between you and the business. Same taxes as a sole proprietor by default.
• LLC taxed as an S-corp: you pay yourself a reasonable salary and can take the rest as distributions, which aren't hit with self-employment tax. More paperwork and cost.
• Self-employment tax is 15.3% (12.4% Social Security up to $184,500 in 2026, plus 2.9% Medicare with no cap).
• The S-corp only pays off when your profit is comfortably above a reasonable salary for your work. Run the numbers with a CPA.

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. There's nothing to set up. You report income on Schedule C with your personal tax return.

The problem: you and the business are legally the same person. If a customer sues over a job, they're suing you. Your truck, savings, and house are exposed.

You also pay self-employment tax on your net earnings. That's 15.3%: 12.4% for Social Security (on earnings up to the 2026 wage base of $184,500) and 2.9% for Medicare (no cap). An extra 0.9% Medicare tax kicks in above $200,000 for single filers.

Sole proprietor is fine for testing the waters. It's not a foundation for a real trade business.

LLC: the right first move for most tradespeople

An LLC creates a legal wall between you and your business. Business debts and contract claims generally stay with the business, as long as you keep finances separate and don't sign personal guarantees.

One important limit: an LLC doesn't shield you from your own negligence on a job. That's what liability insurance is for.

Taxes: A single-member LLC is taxed exactly like a sole proprietor by default. Same Schedule C, same self-employment tax. A multi-member LLC is taxed as a partnership (Form 1065) by default. The LLC's win is protection, not tax savings.

Cost: In Colorado, filing online costs $50 plus a $25 annual Periodic Report (confirm current fees with the Secretary of State). Other states vary widely.

For a deeper look, read Why an LLC Is the Best First Move for Your Trades Business.

S-corp election: the tax move once you're making real money

Here's how the S-corp election works:

1. The business pays you a reasonable salary through payroll. Payroll taxes apply to that salary.
2. Remaining profit can come out as distributions. Distributions aren't subject to self-employment or payroll tax.

The IRS is clear that the salary must be reasonable. Its guidance says the key question is what you did for the business. If most of the revenue comes from your own hands-on work, most of it should be wages. The IRS looks at things like your training, duties, hours, and what comparable businesses pay for similar work.

A simplified 2026 example

Say your trade business nets $100,000 before paying you.

As a sole proprietor or default LLC:
Self-employment tax applies to 92.35% of net earnings. $100,000 × 92.35% = $92,350 × 15.3% ≈ $14,130

As an LLC taxed as an S-corp, paying yourself a $60,000 salary:
Payroll taxes (employer + employee share) on $60,000 × 15.3% ≈ $9,180 The remaining $40,000 comes out as distributions with no payroll tax.

That's a difference of roughly $4,950 in this example. But the real savings will be smaller, because the S-corp adds costs:

• A payroll service and quarterly payroll filings
• State unemployment insurance on your wages
• A separate business return (Form 1120-S, plus Colorado's DR 0106)
• Higher bookkeeping and CPA fees
• Possible effects on other deductions, like the qualified business income (QBI) deduction

And if $60,000 isn't a reasonable salary for your work, the math changes. This example is for illustration only. Your CPA should run your real numbers.

How to make the election

You file IRS Form 2553. Generally it's due no more than 2 months and 15 days after the start of the tax year you want it to apply to. Late elections are sometimes possible, but don't count on it. Plan ahead with your CPA.

So which one is right for you?

Just starting out or profit is still modest: LLC

Get the protection. Keep it simple. Spend your energy on getting work and pricing it right. (Start with how to price your jobs.)

Profit consistently well above a reasonable salary: talk to a CPA about the S-corp election

There's no magic number. The election pays off when the tax saved beats the extra costs, year after year.

Going in with a partner: LLC with a solid Operating Agreement

Spell out who owns what, how decisions get made, how money comes out, and what happens if someone wants out, gets hurt, or dies. Fund that plan with buy-sell life insurance.

Quick comparison

FAQ

Is an S-corp better than an LLC?
They're not competitors. An LLC is the legal structure. An S-corp is a way that structure can be taxed. Many tradespeople end up with an LLC taxed as an S-corp once profit grows.

Can I switch to S-corp later?
Yes. Many owners start as a default LLC and make the election once profit justifies it.

What's a reasonable salary for an electrician or HVAC tech?
There's no single number. The IRS looks at your duties, experience, time spent, and what comparable businesses pay for similar work. Your CPA can help you document it.

Does the S-corp election change my liability protection?
No. Liability protection comes from the LLC (or corporation), not the tax election.

Get the structure right from day one

Fresh Start Consulting helps contractors and independent operators choose and set up the right structure through trusted formation and legal partners. See our Business Formation services or book a free 30-minute call and we'll look at where you are.

This article is for educational purposes only and is not legal or tax advice. Tax rules change, and the right structure depends on your income, state, and goals. Talk to a licensed CPA or attorney about your specific situation before you act.

Evan Lightner is the founder of Fresh Start Consulting. He started as a 12-volt and telematics technician and built his first company from the ground up. More about Evan.