What's the Difference Between a Sole Proprietorship and S Corp?

A sole proprietorship and an S Corporation (S Corp) are both types of business entities, but there are significant differences between the two.

1. Legal Structure: A sole proprietorship is an unincorporated business owned and run by one person, while an S Corp is a corporation that has elected to be taxed as a pass-through entity.

2. Liability: As a sole proprietor, you are personally liable for all of your business's debts and obligations. In contrast, an S Corp provides limited liability protection for its shareholders, meaning that their personal assets are generally protected from the company's liabilities.

3. Taxes: In a sole proprietorship, the business income is reported on the owner's personal tax return, and the owner pays taxes on all profits earned by the business. In an S Corp, the business income is passed through to the shareholders, who report it on their personal tax returns. However, S Corp shareholders are not subject to self-employment taxes on the company's profits, unlike sole proprietors who are subject to self-employment taxes on all business profits.

4. Ownership and Management: A sole proprietor owns and manages the business themselves, while an S Corp has shareholders who own the company and a board of directors who manages the company's affairs.

5. Formalities: A sole proprietorship is generally less formal and requires fewer filings and paperwork than an S Corp. S Corps must file annual reports, hold regular meetings, and comply with other formalities to maintain their status.

Overall, the choice between a sole proprietorship and an S Corp will depend on the individual's goals, the nature of their business, and other factors. It is recommended to consult with a business attorney or accountant to determine the best structure for your business.