Main Differences Between Sole Proprietorship and S Corp
The main differences between a Sole Proprietorship and an S Corp are liability protection and potential tax advantages. An S Corporation offers liability protection, whereas a Sole Proprietorship does not. An S Corporation is exclusive to the United States.
Tax Implications and Differences
Sole proprietorships must report all income as taxpayer income and pay self-employment taxes for Social Security and Medicare. S corporations do not pay self-employment taxes. If you make over $80,000 in net earnings, an S corp may provide tax benefits versus remaining a sole proprietorship.
Conversion Process to S Corp
A sole proprietorship must first form either an LLC or a C corp and then elect S corp status with the Internal Revenue Service to be changed to an S corp directly.
Some key differences between sole proprietorships and S corps relate to income distribution, liability protection, and legal structure. S corps provide liability protection that sole proprietorships lack. While single-member S corporations are legal, a sole proprietor can’t file taxes as an S corporation without first incorporating.