© Copyright Acquisition International 2025 - All Rights Reserved.

Article Image - The Main Differences Between Sole Proprietorships & S-Corps
Posted 1st November 2021

The Main Differences Between Sole Proprietorships & S-Corps

One of the biggest decisions a self-employed freelancer turned business owner has to make is deciding what type of business entity works best for them. If you’re the only owner of your company, your options often narrow down to two: an S-Corp or sole proprietorship.

Mouse Scroll AnimationScroll to keep reading

Let us help promote your business to a wider following.

The Main Differences Between Sole Proprietorships & S-Corps
Sole Proprietorships

One of the biggest decisions a self-employed freelancer turned business owner has to make is deciding what type of business entity works best for them. If you’re the only owner of your company, your options often narrow down to two: an S-Corp or sole proprietorship.

In this article, we’ll look at the differences between both business types, what their advantages are, and how you’ll be taxed. When you decide to become a business entity, we recommend using technology like a paystub generator to increase your profitability and productivity.

The Difference Between a Sole Proprietorship and an S-Corp

A sole proprietorship is a common business entity and the easiest type to start and operate because you don’t need to register your business with your home state. 

Technically, if you haven’t registered your business with your state after forming an LLC, you’re considered a sole proprietorship. Independent contractors, freelancers, and sole proprietors are technically the same thing and have the same tax burdens as someone who is self-employed.

An S-Corp (Small Business Corporation) is a type of corporation formed through filling a certificate of formation with the Secretary of State where the company is headquartered.

Unlike with a sole proprietorship, an S-Corp is a business entity that passes taxation to the shareholders and pays them with distributions. Therefore, the corporation remains distinct from its shareholders, and the owners are held legally liable for business debts.

The Advantages of an S-Corp

There are several advantages of declaring your business as an S-Corp, including:

  • Protected Assets: With S-Corps, the CEOs’ personal assets are protected from their shareholders. If the CEO has debt or goes bankrupt, the shareholder must pay it.
  • Pass-Through Taxation: S-Corps don’t pay federal taxes at the corporate level and have “pass-through” taxation. Therefore their shareholders take on this burden.
  • Straightforward Transfer of Ownership: S-Corps can be transferred freely without triggering adverse tax consequences, unlike with a partnership or LLC.
  • More Credibility: S-Corporations are considered more credible to employees, customers, and vendors because it shows you take your business seriously.
  • Cash Accounting Method: S-Corps must use the accrual method of accounting if they have inventory unless they’re a small company (less than $5 million a year).

 

Advantages of a Sole Proprietorship

There are also advantages of staying as a sole proprietorship, including:

  • Affordable and Simple: Running a sole proprietorship is simple and inexpensive.
  • Freedom and Flexibility: Independent businesses aren’t restricted to complicated business regulations and have decision-making freedom.
  • Less Paperwork: Sole proprietors only have to file their taxes once a year.
  • Simple Income Tax: Freelancers are privy to more tax deductions than S-Corps.
  • Low Business Fees: With a sole proprietorship, owners pay fewer fees when they want to register their business structure. S-Corps cost significantly more.
  • Straightforward Banking: CEOs can choose to keep their personal or business expenses together because they don’t have to pay two separate tax returns.
  • Easy Ownership: Sole proprietorships have the easiest business structure out of any other company type because the owner is responsible for everything.

 

How the Owners Get Taxed

S-Corps have a pass-through tax structure that transfers the taxes they pay on their business income on to their shareholders. Owners are eligible for the 20% pass-through entity tax deduction, but they aren’t able to cash in on other deductions; shareholders receive them.

S-Corporations receive tax benefits through savings on self-employment taxes. S-Corp owners must pass a portion of their profits to their shareholders as a distribution, not an income, which makes them exempt from Medicare and Social Security taxes.

An owner of a sole proprietor still pays self-employment taxes, is considered a business owner instead of an employee, and reports their income on an IRS Form 1040. Sole proprietors may be eligible for the 20% pass-through income tax reduction rate depending on their circumstances. 

Although owners are considered business owners, they don’t pay payroll taxes on their income and won’t be charged for state or federal unemployment taxes or worker’s compensation. 

Self-employment taxes consist of a 2.9% Medicare tax with no annual income ceiling and a 12.9% Social Security tax, which does have a ceiling once you earn enough.

How the Owners Get Paid

Owners of S-Corps pay themselves a salary and can take some of their compensation in the form of distributions. However, since distributions aren’t subject to payroll taxes, they can’t take the bulk of their income through this method. Otherwise, the IRS will audit them.

Sole proprietorship owners pay themselves a salary in the same way they did as independent contractors. Since money can’t be held up in the business and they pay self-employment taxes, they can use as much or as little money as they wish for personal use.

Categories: M&A


You Might Also Like
Read Full PostRead - Eye Icon
Henry Schein to Acquire RxWorks
M&A
12/01/2016Henry Schein to Acquire RxWorks

Henry Schein, Inc, the world's largest provider of health care products and services to office-based dental, animal health and medical practitioners, announced an agreement to acquire RxWorks.

Read Full PostRead - Eye Icon
Why Accountability is a Core Element of Workplace Culture and Leadership
News
20/03/2023Why Accountability is a Core Element of Workplace Culture and Leadership

It’s incredibly difficult to develop a successful business and a thriving team without accountability, yet so many businesses neglect to develop this aspect of their workplace culture. If no-one (even in the leadership team) takes ownership of their responsi

Read Full PostRead - Eye Icon
Why Moderating Your Social Media is Important as a Business
Innovation
25/11/2022Why Moderating Your Social Media is Important as a Business

Sadly, even the most useful tool can quickly become a destructive weapon when it is placed in the wrong hands. This fact of life permeates every industry, every family, every community. Something designed to valuable and beneficial can be used to cause harm wh

Read Full PostRead - Eye Icon
Six Tips for Information Exchange in Due Diligence Investigations and M&A Transations
M&A
05/10/2023Six Tips for Information Exchange in Due Diligence Investigations and M&A Transations

M&A deals made with UK involvement fell to a 14-year low in 2023 to a total value of £144.7bn. This is down from last year by 45%, the lowest year-to-date total since 2009 amid the turmoil of the global financial crisis. M&As involving a UK target have also o

Read Full PostRead - Eye Icon
From Ledgers to Digital: The Evolution of Accounting Practices
News
27/10/2023From Ledgers to Digital: The Evolution of Accounting Practices

For thousands of years, accounting has been an integral part of civilization. From the earliest days of recorded history, bookkeepers have been tracking credits and debits, assets and liabilities. While the fundamental principles remain unchanged, the tools an

Read Full PostRead - Eye Icon
Why Remortgaging is a Game-changer For Modern Home-owners
Finance
22/01/2021Why Remortgaging is a Game-changer For Modern Home-owners

In the UK, whilst the numbers can fluctuate, roughly 39,000 remortgages occur on a monthly basis. In fact, in the first quarter of 2019, almost 40% of property loans were remortgages - with good reason. Getting on the property ladder is usually one of the main

Read Full PostRead - Eye Icon
Your Business Guide to Using Shopify Effectively and Making More Sales
News
15/08/2022Your Business Guide to Using Shopify Effectively and Making More Sales

Shopify can be a boon for small businesses, but only if you use it optimally. Improving sales figures and boosting customer loyalty is possible with the right tools and tactics on your side. This brief guide will get you started on your journey to leveraging S

Read Full PostRead - Eye Icon
Auction Mobility Acquires Lofty.com
M&A
13/10/2016Auction Mobility Acquires Lofty.com

Today, Auction Mobility, LLC, the leader in mobile and online auction software, announced the acquisition of Lofty.com

Read Full PostRead - Eye Icon
MUFG Investor Services to Acquire Capital Analytics from Neuberger Berman
Finance
04/02/2016MUFG Investor Services to Acquire Capital Analytics from Neuberger Berman

MUFG Investor Services, the global asset servicing group of Mitsubishi UFJ Financial Group, has reached an agreement with Neuberger Berman, one of the world’s leading private, employee-owned investment managers, to acquire its private equity fund administrat



Our Trusted Brands

Acquisition International is a flagship brand of AI Global Media. AI Global Media is a B2B enterprise and are committed to creating engaging content allowing businesses to market their services to a larger global audience. We have a number of unique brands, each of which serves a specific industry or region. Each brand covers the latest news in its sector and publishes a digital magazine and newsletter which is read by a global audience.

Arrow