LLC vs Sole Proprietorship: When to Switch (with the math)

Published April 7, 2026 · 2 min read

The exact profit threshold where an LLC + S-Corp election starts saving you real tax money.

Every freelancer eventually asks: should I form an LLC?

The honest answer is: it depends on your profit. Below a threshold, the LLC overhead costs more than it saves. Above it, you're leaving money on the table by not converting.

What an LLC actually does for taxes

By default, a single-member LLC is taxed exactly like a sole proprietorship. No tax change. The savings come from electing S-Corp status.

S-Corp election lets you split your profit into:

1. A "reasonable salary" (subject to ~15.3% payroll tax)
2. Distributions (NOT subject to payroll tax)

That's where the savings live.

The break-even

For most service businesses in the US, the math starts working in your favour around $50,000 in net profit. Below that, the cost of payroll services, separate filing, state franchise fees, and bookkeeping eats the savings.

LLC vs Sole Prop Calculator — Should you form an LLC? AI analyses your situation and recommends the right structure.

The not-tax reasons

Even when the tax savings are small, an LLC gives you:

• Liability separation — your personal assets are (mostly) shielded
• Credibility — clients and vendors take "Acme LLC" more seriously
• Banking — easier to open a real business account

Run your numbers in the LLC vs Sole Prop calculator to see which side of the break-even you're on.