Solopreneur Basics
By: Financial Hotline
Spring 2026 (Vol. 44, No. 1)
Q: What are the best entity options for a new small business with one owner who is also the only employee?
A: The most common choice in 2026 is a single-member Limited Liability Company (LLC), potentially with an S-Corporation tax election once profits justify it. However, choosing the best entity depends on which option works for you. Here's a clear breakdown to help you decide.
1. Sole Proprietorship
This option is a default. If you don't choose a specific entity form, you are a sole proprietor.
How it works: No formal entity formation. You and the business are legally the same. You report income and expenses on Schedule C of your personal Form 1040.
Pros: This choice is the simplest and cheapest, there are no filing fees, no annual reports, minimal paperwork and you have full control.
Cons: You have personal liability, which means your personal assets (home, savings, car, etc.) are at risk if the business is sued, has debts, or faces a claim. You pay full self-employment tax (15.3% on net profit for Social Security and Medicare) plus income tax. It is harder to open business bank accounts or get certain loans and credibility.
Best for: Very low-risk, low-revenue testing phase, such as part-time sales or work with income under $20K-30K with no contracts or liability exposure. Most experts recommend moving beyond this quickly for any real business activity.
2. Single-Member LLC
How it works: To form you file Articles of Organization with your state Department of Corporations. By default, it's taxed as a 'disregarded entity', the same as a sole proprietorship using Schedule C and you pay full self-employment tax. You can obtain an EIN (Employer Identification Number) and open a business bank account in the LLC's name.
Pros: A formal entity can give you more professional credibility with clients, banks, and vendors. You have limited liability protection which separates personal and business assets so your home and savings are generally shielded from business lawsuits and debts, if you maintain proper separation. It is simple and flexible with fewer formalities than corporations such as no required board meetings or minutes. It's also easy to change tax treatment with options such as an S Corporation.
Cons: The paperwork process is minimal but you will have to pay a small fee (around $150) to form your LLC. There is also an annual report due every year with a similar fee to keep the registration active. An LLC still pays full self-employment tax on all profits by default.
Best for: Most solo owners starting out, especially if there's any risk of contracts, clients, products, or services that could lead to claims.
3. LLC Taxed as an S-Corporation
How it works: Go to your State Department of Corporations website and form a single-member LLC first. Then file IRS Form 2553 to elect S-Corp taxation. It is usually effective the same year if filed timely. You become both owner (shareholder) and employee. You can pay yourself a reasonable salary with a W-2, and subject to payroll taxes then take remaining profits as distributions which are not subject to self-employment tax.
Pros: This keeps the LLC's liability protection and flexibility with the added bonus of significant self-employment tax savings once net profit reaches around $50K to $60K+ and savings increase with higher profits. Example: At $100K net profit, you might save several thousand dollars annually compared LLC or sole proprietor taxation. This entity enjoys pass-through taxation (which means it avoids corporate-level tax) and you may be able to contribute more to retirement plans such as a Solo 401k.
Cons: You will face more compliance. For example, you must run payroll, file quarterly payroll taxes, issue yourself a W-2, and file Form 1120S annually. You typically will have extra accounting and payroll costs as well. You can't just take what you want as distributions. The IRS requires you to be paid a reasonable salary. This has to be fair market value for your work based on your industry, duties, and location. If you pay yourself too little, you could be at risk for an audit resulting in re-characterization of distributions as wages. It isn't ideal for a business with profits under $50K to 60K as compliance costs may outweigh savings.
Best for: Solo businesses with growing or solid profits where tax savings make sense. Many owners start as a default-taxed LLC and elect S-Corp later as their business grows.
4. C-Corporation (Usually Not Recommended Here)
Why: The corporation is the least chosen option due to the double taxation of corporate tax plus dividends, more formalities, and higher entity maintenance costs. It's usually not needed for a one-person operation but it still may work for businesses planning to raise venture capital or go public.
Q: If I choose the simplest form, how do I pay myself?
A: Even when your business is just starting out, it's important to open a separate checking account and keep your business and personal funds separate. For sole proprietors or single-member LLCs, you typically take an owner's draw by transferring money from your business account to your personal account rather than taking a traditional salary. The key is doing it consistently, keeping records, and not draining the business of needed cash.
Q: How should I track income, expenses, and bookkeeping?
A: Simple options include software like QuickBooks Self-Employed, Wave, or even spreadsheets at first. Categorize everything, save receipts, and review weekly or monthly. Good bookkeeping helps spot problems or patterns early and maximizes deductions.
Q: What taxes do I owe, and how do I handle quarterly estimated payments?
A: Federal Income Tax. The options recommended above (1-3) are all pass-through entities. This means the business doesn't owe taxes and the income passes through to you, is added to your income and taxed at your personal income tax rate. You may qualify for the 20% Qualified Business Income (QBI) deduction, which can reduce the taxable amount of your profits.
Self-Employment (SE) Tax (also known as FICA or Payroll Taxes). For sole proprietors and default LLCs, the amount due is calculated as 15.3% of the business net profits. This covers Social Security and Medicare. You do get to deduct half of the SE tax as an adjustment to income and only 92.35% of the earnings are subject to the rate in the calculation.
The S Corporation pays W-2 wages with Federal income tax paid accordingly. You still owe FICA but the business pays half of the tax (7.65% ) and the other half (7.65%) is withheld from your paycheck as an employee. The remaining profits are taken as distributions to you and are not subject to FICA but are subject to Federal Income Tax.
Quarterly Estimate Taxes. If you expect to owe more than $1,000 in tax payments, you will need to make quarterly estimated taxes using form 1040-ES. In 2026, the due dates are April 15, June 15, September 15 and January 15, 2027.
State Taxes. Depending on your location, you may owe state taxes.