One Person Company Legal Structure: LLC vs Sole Proprietorship vs S-Corp

Written by Casey, Head of Content at One Person Company. Casey formed an LLC in 2025 and has tracked the legal structures of 40+ solo founders. This article reflects personal experience and patterns observed across the tracking group, not legal advice.

I formed my LLC in January 2025. Cost: $200. Time: 3 days. It was the single best business decision I made in my first year — not because it saved me money immediately, but because it forced me to think like a business owner instead of a freelancer with a website.

Here's what you need to know about legal structures for a one person company in 2026.

The Three Main Options

Sole Proprietorship

What it is: You and your business are legally the same entity. No registration required beyond any local business licenses. You report business income on your personal tax return (Schedule C).

Pros:

  • Zero setup cost or paperwork
  • Simple tax filing (Schedule C on personal return)
  • No annual reports or franchise taxes

Cons:

  • Zero liability protection. Client sues your business = client sues YOU. Your personal assets (house, car, savings) are at risk.
  • Harder to open business bank accounts and payment processing
  • Less credible to enterprise clients
  • No tax flexibility (all profit is subject to self-employment tax)

Best for: Testing a business idea with very low liability risk (writing, consulting with no physical products). If you make more than $10,000, form an LLC.

LLC (Limited Liability Company)

What it is: A separate legal entity that owns the business. You're a member of the LLC, not personally the business. This is what I use and what 85% of the solo founders I track use.

Pros:

  • Liability protection: business debts and lawsuits are generally limited to business assets
  • Credibility: enterprise clients expect to contract with an entity, not an individual
  • Tax flexibility: can be taxed as sole proprietorship (default), S-Corp, or C-Corp
  • Easy to form ($50-$500 depending on state, takes days)

Cons:

  • Annual fees and filings ($0-$800/year depending on state)
  • Separate bank account required (mixing personal/business funds can "pierce the corporate veil" and eliminate liability protection)
  • Slightly more complex tax filing

Cost timeline:

  • Formation: $50-$500 one-time
  • Registered agent (if required): $0-$150/year
  • Annual report/franchise tax: $0-$800/year depending on state
  • My annual cost: $200 (Delaware annual franchise tax) + $0 (self-file annual report)

S-Corporation

What it is: Not a separate entity type — it's a tax election you make with your LLC or corporation. Informs the IRS to tax you differently.

Why people do it: Self-employment tax is 15.3% on all profit as a sole proprietor or default LLC. With S-Corp election, you pay yourself a "reasonable salary" (subject to payroll tax) and take the rest as distributions (not subject to self-employment tax).

The math: At $100,000 profit as sole proprietor: roughly $15,300 in self-employment tax. As S-Corp with $60,000 salary (reasonable for your role) and $40,000 distributions: roughly $9,180 in payroll tax on salary + $0 on distributions = save $6,120.

When it makes sense: Profit consistently exceeds $60,000-$80,000 AND the "reasonable salary" for your role is meaningfully lower than total profit.

Cons:

  • Payroll requirements (you must run payroll for yourself)
  • Additional tax filing (Form 1120S, K-1, quarterly payroll taxes)
  • Higher accounting costs ($500-$2,000/year for tax prep)
  • State-level S-Corp rules vary

Best for: Solo founders consistently earning $80,000+ in profit where the tax savings exceed the additional accounting costs.

How I Decided

In January 2025, when I was making $2,400/month, I asked three questions:

  1. Will clients take me more seriously as an LLC? Yes. My first two enterprise clients asked for my W-9 and were visibly more comfortable seeing an LLC EIN than a social security number.
  1. Is there any liability risk? Moderate. I write about business topics and provide templates. Low risk, but not zero risk. The LLC cost $200 for peace of mind.
  1. Will I regret NOT having an LLC later? Yes. Converting from sole proprietorship to LLC later means changing bank accounts, payment processors, contracts, and tax IDs. Do it once at the start.

State-by-State Considerations

Best states for solo LLCs

  • Wyoming: No state income tax, low annual fees ($60), strong privacy protections
  • Delaware: Business-friendly courts, established case law, no state income tax for businesses not operating in Delaware. I formed here.
  • New Mexico: No annual report requirement, low fees, privacy protections

Important: You still pay taxes where you live and work

Forming an LLC in Wyoming doesn't exempt you from California taxes if you live and work in California. You'll pay California franchise tax ($800 minimum) plus file as a foreign LLC.

Practical advice: Form where you live

Unless you have a specific reason to form elsewhere (investors, specific legal protections), form in your home state. Foreign LLC registration and multiple state filings add complexity and cost that usually outweighs the benefits for a solo founder.

Steps to Form Your LLC

  1. Pick a name. Check your state's business registry. Don't overthink this — your company name can be different from your brand/website name.
  1. File Articles of Organization. Your state's Secretary of State website. Takes 15 minutes. Cost: $50-$500.
  1. Get an EIN from the IRS. Free. Takes 5 minutes online. You need this for bank accounts and tax filing.
  1. Open a business bank account. Bring your Articles of Organization and EIN. Use this account exclusively for business transactions. Never mix personal and business funds.
  1. Set up payment processing. Connect Stripe to your business bank account. Takes 20 minutes.
  1. Get business insurance if needed. General liability insurance: $300-$600/year. Professional liability (errors & omissions): $500-$1,500/year. Required for some client contracts; recommended for anyone giving professional advice.

That's it. The entire process took me 3 days, most of which was waiting for the state to process the Articles of Organization.

For a complete walkthrough of setting up a one person company from scratch: step-by-step guide to building a one person company.

Frequently Asked Questions

Do I need an LLC for a one person company?

Legally no. Practically yes. The liability protection, client credibility, and tax flexibility are worth $200-$500. Every founder in my tracking group who started as a sole proprietor converted to an LLC within 18 months. Do it at the start.

LLC vs S-Corp: which is better?

LLC by default, add S-Corp election when your profit consistently exceeds $60,000-$80,000/year. Before that threshold, the tax savings don't justify the additional payroll complexity and accounting costs.

How much does an LLC cost per year?

Varies by state. Delaware: $200-300/year (franchise tax). Wyoming: $60/year. California: $800/year minimum. Most states: $0-$300/year. Check your Secretary of State website for exact numbers.

Can I form an LLC myself or do I need a lawyer?

For a solo service business with simple structure: DIY through your state website. For anything involving partners, investors, significant liability, or complex ownership: use a lawyer. I formed mine myself in 15 minutes. Three years later, no issues.

Ready to start? Read our complete guide to building a one person company or explore 15 solo business ideas you can start today.

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