Short version: start simple, get an LLC once you've got real stuff to lose, and don't touch the S-corp election until you're clearing somewhere around $60K–$80K in profit and your bookkeeping is buttoned up.

Every guy who's ever started a crew has had this conversation at the bar. Somebody's brother-in-law says "you gotta be an LLC," somebody else says "S-corp saves you a fortune," and the guy at the end swears he's been a sole prop for 22 years and never had a problem. They're all kinda right and all kinda wrong. Here's how it actually shakes out.

Sole Proprietor: the default you're already in

If you've got a truck, some tools, and you're taking jobs under your own name, congrats, you're a sole proprietor. No paperwork, no state filing, no extra tax return. Your profit lands on a Schedule C with your personal 1040 and that's it.

That simplicity is the whole appeal. When you're doing $40K of side work or you just went out on your own, the last thing you need is another filing deadline and another bill from your accountant.

The catch is there's zero line between you and the business. Business debt is your debt. A lawsuit against the business is a lawsuit against you, your house, your savings, your boat. And you pay self-employment tax of 15.3% on your net profit (12.4% Social Security up to the 2026 wage base of $184,500, plus 2.9% Medicare on all of it). Clear $90K and roughly $12,700 of that goes to SE tax before income tax even shows up.

Sole prop is fine for getting started. It's not where you want to be once you've got employees, subs, bigger contracts, or a house worth protecting.

LLC: is real protection, but not a force field

An LLC is a legal wrapper, not a tax setup. By default the IRS treats a single-member LLC exactly like a sole prop: same Schedule C, same 15.3% SE tax. What you're buying for the state filing fee (anywhere from about $50 to $500 depending on your state, plus annual reports in most) is a wall between the business and your personal stuff.

Here's what that wall actually stops:

• A supplier or customer suing the company over a contract dispute. They go after business assets, not your house.
• Business debts you didn't personally sign for.
• Mistakes made by an employee on the job, in most cases. The company's on the hook, not you personally.

Here's what it doesn't stop, and this is where guys get burned:

• Your own work. If you personally frame a deck wrong and it collapses, you can be sued personally for your own negligence. The LLC doesn't shield you from what your own hands did. That's what general liability insurance is for.
• Anything you personally guaranteed. Equipment loans, the line of credit, the supply house account, your truck lease. Most lenders make you sign personally, and once you do, the LLC is irrelevant for that debt.
• Payroll taxes. If you withhold taxes from employees and don't send them in, the IRS comes after you personally. Every time.
• Sloppy operation. Mix business and personal money, pay your mortgage out of the business account, skip the annual report, and a judge can "pierce the veil" and treat the LLC like it doesn't exist.

So the real play is LLC plus good insurance plus a separate bank account you never cross-contaminate. The LLC handles the business-side risk, insurance handles the job-site risk, and clean books keep the wall standing. Skip any one of the three and the other two get a lot weaker.

S-corp election: where the tax savings live

An S-corp isn't a different company. It's a tax election you file with the IRS (Form 2553), usually on top of an LLC. Nothing changes on the job site. What changes is how you get paid.

As a sole prop or plain LLC, every dollar of profit gets hit with 15.3%. As an S-corp, you put yourself on payroll with a reasonable salary, and only that salary pays Social Security and Medicare. Whatever's left over comes out as a distribution, which skips the 15.3%. Still pays income tax, just not the payroll tax.

Here's a rough look at a contractor clearing $120K in profit who pays himself a $60K salary:

Now subtract what it costs you. Payroll software runs a few hundred to $1,000 a year. A separate corporate return (Form 1120-S) usually runs $1,000–$2,500 from a CPA. Some states tack on franchise taxes or fees. And because your salary doesn't count toward the 20% qualified business income deduction, you give a little of that back too. In this example you're probably netting $3K–$5K a year, not the $7,770 your buddy bragged about.

When it starts making sense: for most trades guys, once net profit (not revenue) is steadily north of $60K–$80K. Below that, the costs and hassle eat most of the savings. Above $100K, it's usually worth a serious sit-down with a CPA.

The "reasonable salary" part is not optional. You can't pay yourself $15K and pull $105K in distributions. The IRS looks at what you'd pay someone to do your job, and a lowball salary is one of the easiest audit flags out there. If a project manager or lead carpenter in your area makes $65K, that's your neighborhood.

Two more things nobody mentions at the bar. A lower salary means smaller Social Security credits, so your benefits down the road shrink a bit. And the election has a deadline: to have it count for a calendar year, file within 2 months and 15 days of the year starting (March 15 for most). Miss it and you're usually waiting until next year unless you qualify for late-election relief.

So which one is for you?

The structure won't make or break your business. Pricing, cash flow, and showing up when you said you would do that. But picking the wrong one either leaves your house exposed or leaves a few grand on the table every April, and neither one is a fun conversation with your wife.

Not legal or tax advice. State rules and fees vary a lot, so run your numbers past a CPA who works with contractors before you file anything.

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