LLC, S-Corp, or Sole Proprietorship – Which Should Creators Choose?

Creators are small businesses. And that means you need to figure out the best business entity for your size and needs. 

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The three most common business entities for creators are sole proprietorships, limited liability companies, and S-corporations. 

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Here’s a rundown of each type to help you choose what is best for you.

• Distributions: Distributions are the owners’ and shareholders’ share of the business profits, after salaries.

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• Employer Identification Number (EIN): A 9-digit number that the IRS uses to identify business taxpayers.

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• FBN or DBA: A “fictitious business name” or a “doing business as” is the name you conduct business under. They are also referred to as trade names.

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• Limited liability company (LLC): A type of business entity that can have one or more owners and limits the personal liability of the owner(s) from business debts and obligations.

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• Minutes: Records of company meetings, which are required of all incorporated entities.

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• Pass-through business: A type of business entity that passes the business profits directly to the owner or owners’ income. Taxes can also be passed directly to owners, so they only have to file personal income tax returns.

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• Sole proprietorship: An unincorporated pass-through business where the owner (aka the creator) pays personal income taxes on any business profits.

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• S-Corporation: An alternative to an LLC, it’s a type of business entity that is taxed as a pass-through business rather than as a corporation, as long as they have 100 or fewer shareholders.

Especially when first starting out, creators do not need to form a legal business entity. By default, all creators become sole proprietorships as soon as they start working as an independent creator. They are the easiest business entity to form because you technically don’t have to file any paperwork or pay any fees unless you want to register with your state. 

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If creators do want to register as sole proprietorships, it’s relatively easy and low-cost to do so. It varies from state to state, but generally, you need to register your FBN or DBA if you choose to do business under a name besides your own, apply for any necessary licenses or permits (unlikely for creators), get an EIN, and operate a business bank account.

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And doing your taxes? Easy – sole proprietorships are pass-through businesses, which means that all business profits are considered personal income and “pass through” directly to you. That means creators only need to file a personal income tax return. 

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However, If you do hire an employee or employees, you’re responsible for reporting quarterly employment taxes. If you sell merch, you’ll have to report sales taxes, and if you own business property, you’ll owe property taxes.

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The downsides of sole proprietorships is that, because your business is not registered with the government, you receive no protection. Because sole proprietorships are not separate entities from yourself, you are personally responsible for your business’ liabilities. So if your business has debts, that means those are actually your debts.

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Creators are small businesses (sometimes large businesses), and, as a business, you might find yourself needing outside capital. One of the main challenges of sole proprietorships is that it’s difficult to raise capital. Although getting approved for a bank loan depends more on your credit and revenue generation, creators operating as sole proprietors should be careful because any bank loans will be your personal responsibility.

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TL;DR – Sole Proprietorships

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Pros of sole proprietorships

• Easy to set up
• Low registration fees
• Simple taxation
• Pass-through income

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Cons of sole proprietorships

• Personal liability for business debts
• Difficult to raise outside capital

Creators should think of LLCs as the next step in their careers. Like sole proprietorships, LLCs are pass-through business entities. The key difference lies in the fact that an LLC protects you from the legal liabilities of your business. Meaning, if legal issues befall your business, your personal assets remain protected.

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LLCs can have more than one owner (also referred to as “members”), which means creators can actually form businesses with other people. So, say, you create content on YouTube with a group of people – you can form an LLC with that group (and there’s no limit to the number of people).

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Forming an LLC is slightly more complicated that registering a sole proprietorship, but is still considerably simpler than forming a corporation. The requirements vary depending on the state you’re forming the LLC in, but generally, you need a business name, EIN, the names and addresses of all the LLC members, and their rights, powers, duties, and responsibilities in the organization. And yes, you will have to file both at the state and federal level. 

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While the cost to form an LLC is still low compared to corporations, many states charge recurring fees. For example, California charges LLCs an annual tax of $800, regardless of whether or not you’re currently doing business.

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TL;DR – LLCs

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Pros of LLCs

• Easy to form (compared to corporations)
• Protect personal assets from business liabilities
• Multiple owners/members
• Pass-through income and taxation
• Easier to convert to C-corps

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Cons of LLCs

• If a member dies or declares bankruptcy, LLC may may need to be dissolved
• Costs money to form
• Recurring annual fees

If a creator wants to keep a bigger chunk of their paychecks, or even raise money through stock shares, they should consider forming an S-corp.

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Creators should think of S-corporations as a combination between LLC and C-corps. Like LLCs, S-corps are pass-through businesses, which means they don’t have to pay corporate taxes. However, like C-corps, S-corps are subject to certain government regulations, such as requiring a board of directors, having corporate bylaws, conducting shareholder meetings, and keeping minutes.

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One of the main benefits of S-corps is that creators can save on self-employment taxes that LLCs and sole proprietorships have to pay (and also, no corporate taxes!). In an S-corp, creators are also considered employees as well as employers, and are required to pay themselves a “reasonable salary” (which basically means a fair salary for your industry). You will owe self-employment taxes on that salary, but you can lower those taxes by taking the rest of your income as distributions.

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That being said, the IRS is pretty strict about who and what qualifies as an S-corp. Only U.S. citizens are allowed to form S-corps, and S-corps have to be owned by individuals, not other business entities. There is also a limit to the number of shareholders: S-corps can only have a max of 100 shareholders, which also limits the amount of capital creators can raise.

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Setting up an S-corp can also cost a lot more money than setting up an LLC, ranging from $800 to $3,000 depending on the state and excluding lawyer’s fees. Generally, creators should follow the same steps as setting up an LLC, but with the addition of electing a board of directors and corporate officers, creating bylaws, and scheduling and holding board and shareholder meetings. 

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TL;DR – S-corps

Pros of S-corps

• Lower self-employment taxes
• No corporate taxes
• Pass-through business

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Cons of S-corps

• Strict IRS requirements
• More government oversight
• Higher fees
• Lengthier incorporation process
• Limited growth

Luckily for creators, pass-through business entities like sole proprietorships, LLCs, and S-corps, qualify for a tax deduction called Qualified Business Income (with some exceptions, of course). Unfortunately, the QBI deduction is set to expire in 2025, unless Congress decides to extend it.

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Essentially, creators whose total net income is below $191,950 in 2023 ($383,900 for joint filers) can deduct up to 20% of their qualified income, which can significantly reduce their tax bill.

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Read more about how creators can benefit from QBI here.