Choosing the right business structure is one of the biggest decisions every small business owner faces. It shapes your taxes, liability, compliance, and growth potential.
In this episode of Small Business Smarts, we simplify the differences between an LLC, sole proprietorship, and S-Corp so you can decide which structure best fits your business goals. Learn how each affects your personal protection, paperwork requirements, and payroll setup, plus how ADP helps small businesses stay compliant and manage taxes with confidence no matter which structure you choose.
Whether you’re turning a side hustle into a business or launching a new company, this episode gives you the clarity you need to choose the right business entity and build a strong foundation for growth.
For more information, visit ADP.com/SPARK
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My business is an LLC, but honestly, when I first set it up, I wasn't 100% sure why I chose that type of formation.
When you're starting your business, it's really important to know what different formations mean legally and for tax purposes. So here are the basic differences between an LLC, a sole proprietorship, and an S Corp.
Let's start with the sole proprietorship. Simply put, a sole proprietorship is one person running a business. There's no formal paperwork. You just start doing business. All of your business income and expenses go on your personal tax return, and you pay self-employment taxes, like Social Security and Medicare, on the profits. This is definitely the easiest setup, but because the owner and the business are legally the same, personal assets like a house or a car can be at risk if the business gets sued or goes into debt.
This is sometimes why people choose to form a limited liability company.
An LLC is a separate legal entity, so your personal assets are generally protected from business debts and lawsuits. A sole proprietorship is one person. LLC can have one or multiple owners called members. LLCs can choose to be taxed like a sole proprietorship, which we just talked about. Or like an S Corp, you have to file paperwork with the state that you're forming the business in. And there are periodic filings that you have to keep up with.
But it's way less strict than the next category: The S Corp.
An S Corp is not really even a type of business formation. It's really a way to be taxed that LLCs or corporations can apply for with the IRS.
This is the easiest way that I can explain the tax benefits of an S Corp. Income comes in. You pay your business expenses. You pay your salary and your employee salaries, and you distribute the rest of it, the profit, amongst the owners according to the percentage of the company that they own. So if somebody owns 30% of your company, they get 30% of the profits, and then they pay income taxes on their share of the profits. So unlike the salaries that you paid, these payments aren't subject to self-employment taxes, the Social Security and the Medicare.
The drawback is that there are a lot of rules. You have to meet specific IRS requirements, and there are more formalities like regular meetings and recordkeeping.
No matter which structure you choose. Managing payroll taxes and compliance can get complicated quickly, which is why it's great to have a partner like ADP that have software and services to automate payroll, handle tax filings, classify your employees correctly, and get compliance support that fits even the smallest of businesses. Check out these solutions and more at ADP.com/RUN
