ISSUE 011
Sole Proprietorship, LLC, S-Corp
A founder in Cape Girardeau asked me last week whether she should form an LLC or an S-corp, which is a bit like asking whether to buy a car or an automatic. They are not the same kind of thing, and the fact that the question gets asked that way is not her fault. It is the result of an industry that sells formation services, registered agent subscriptions and tax-savings calculators, and is paid when you decide the answer is complicated. So I went to the three places that actually set the rules — the IRS, the Missouri Secretary of State and the Missouri Department of Revenue — and wrote down what differs.
An idea worth thinking about
The IRS does not have a box for LLC
This is the thing that unlocks the whole question, and the IRS states it in the first line of its own LLC page: a limited liability company is a business structure allowed by state statute. It is a creature of Missouri law. The federal tax code does not recognise it as a tax classification at all.
What the IRS does instead is assign your LLC a default. One member, and it is a disregarded entity — your business income lands on Schedule C of your personal return, exactly as it would if you had formed nothing. Two or more members, and it defaults to a partnership. You can elect to be taxed as a corporation instead, and separately elect S corporation treatment, but those are elections you make on top of the LLC, not features of it.
So the sentence "an LLC will save you on taxes" is, by default, false. Forming an LLC in Missouri changes your liability position. It changes nothing about what you owe the IRS unless you make a further election, and that election is available to corporations too. People who say LLC when they mean S election are conflating a state-law liability wrapper with a federal tax status, and a lot of advertising depends on that conflation holding.
The practical consequence is that the two questions separate cleanly. Question one: do I want a liability shield, and is it worth 50 dollars and the paperwork? Question two, asked later and independently: is my profit high enough that the S election saves more payroll tax than it costs in payroll administration? Answering them together is how people end up paying 800 dollars for something they could have done themselves in twenty minutes.
A tool I disappeared into
Missouri's own checklist of what you have to register for, whatever structure you pick
The Department of Revenue publishes a short Business Registration Checklist as a free PDF. It is not glamorous. It is the list of things Missouri expects you to have sorted before you collect a dollar: your federal employer identification number if you need one, retail sales tax if you sell tangible goods, vendor's use or consumer's use tax, employer withholding if you have staff, and the bond that goes with a new sales tax licence.
What makes it worth the ten minutes is that none of it changes with your entity choice. A sole proprietor selling furniture in Poplar Bluff and a two-member LLC selling furniture in Poplar Bluff register for the same things in the same order. The structure question that absorbs so much attention sits entirely outside this list.
Its limits, stated honestly. This is the Department of Revenue only. Forming the entity happens at the Secretary of State, which is a separate office with separate fees. City and county business licences are separate again — Cape Girardeau, Kirksville and West Plains each have their own, and the state will not tell you about them. Professional licensing is a fourth track. The checklist covers one of four, and it does not say so.
Read it anyway, and read it before you form anything. If you find out at this stage that you need a sales tax bond, that is a cash-flow fact you would rather learn in week one than week six.
Learn something
The free manual that covers what the structure question is actually about
Publication 334, Tax Guide for Small Business, is the IRS's own guide for people who file Schedule C. It is free, it is a PDF, and it is written for sole proprietors and single-member LLCs rather than for accountants. Accounting methods, what counts as a business expense, how to handle inventory, what records you have to keep and for how long. It is the manual for the structure most small businesses are actually in.
The part worth going to first is self-employment tax, because that is the real subject underneath almost every entity-structure conversation. The IRS puts the rate at 15.3 percent — 12.4 percent for Social Security and 2.9 percent for Medicare — on net earnings from self-employment, with the Social Security portion stopping at a wage base the IRS currently gives as 184,500 dollars, and the Medicare portion not stopping at all. You owe it from 400 dollars of net earnings. You deduct the employer-equivalent half when working out adjusted gross income, which reduces income tax and does not reduce the self-employment tax itself.
That is the number that makes the S election interesting, and here is where the honest answer is it depends. In an S corporation you pay yourself a reasonable salary, which carries payroll tax, and take the rest as a distribution, which does not. The saving is real. So are the costs: a payroll service, a separate 1120-S return, a Missouri S corporation filing, and the standing obligation to defend what reasonable means if anyone asks. I could not find a representative study of where that trades off, and the breakeven figures that circulate come from firms that are paid to do the conversion. I would rather say there isn't a published number than quote theirs.
This is not legal or tax advice and I am not qualified to give either. It is the federal manual, free, written by the people who collect the tax. Read the self-employment chapter, then talk to someone with a licence — but go in knowing what the 15.3 percent is, because that is the whole argument.
What we’re seeing
Thirty-one million Americans run their business as a sole proprietorship
For tax year 2022, the IRS counted approximately 31.0 million individual income tax returns reporting nonfarm sole proprietorship activity. The precise figure in the Statistics of Income tables is 30,983,810, up 5.7 percent on 2021. Those businesses reported 2,080.7 billion dollars of business receipts, up 11.4 percent, and 410.7 billion dollars of net income less deficit, which was down 0.2 percent.
Set that against the entity filings. The IRS Data Book for fiscal year 2025 records 6,154,614 Form 1120-S returns from S corporations, 5,215,815 partnership returns on Form 1065, and 2,350,205 returns from C or other corporations. Two things fall out of that. The sole proprietorship is not a fringe choice that unserious people make; it is the overwhelming majority of American businesses. And among those who do incorporate, S corporations outnumber C corporations by about two and a half to one, which makes the S election ordinary rather than exotic.
Divide 410.7 billion by 30,983,810 and you get about 13,255 dollars of net income per return. That arithmetic is mine, not the IRS's, and I want to be clear about how little it means. It is a mean across a distribution that runs from a few hundred dollars of weekend income to a consultant clearing six figures, and the same tables show 133.2 billion dollars of deficits sitting inside the net figure. What it does tell you is the shape of the population: for most of these 31 million filers, the entity-structure question is genuinely not worth much money either way.
Which brings the Missouri numbers into focus. Articles of organization for an LLC cost 50 dollars filed online with the Secretary of State, or 105 dollars on paper. Missouri's published fee schedule contains no annual report fee for LLCs at all — unlike a general business corporation, which files an annual registration report every year at 20 dollars online or 45 dollars on paper. A fictitious name registration, which is what a sole proprietor needs if trading under anything other than their own name, is 7 dollars. Those figures are from the Secretary of State's own schedule; I have not linked it because the site refuses automated requests and this archive only links what it can verify.
So the practical picture for a two-to-twenty-person Missouri business is narrower than the advice suggests. Fifty dollars, once, buys the liability separation an LLC gives you, with no recurring state filing. Your federal tax position does not move unless you make a further election, and that election is worth modelling only once your profit is well clear of what you would have to pay yourself as a salary anyway. Everything beyond that — the registered agent subscriptions, the formation packages, the tax-savings calculators — is sold by people who are paid when you buy it, and the structure of their business is the only reason the question feels complicated.
If you want the inconvenient half: the liability shield is not absolute. It does not survive personally guaranteeing a lease or a loan, which almost every small Missouri business does, and it does not protect you from your own negligence. An LLC is worth 50 dollars. It is not worth believing in.
One question
What structure are you filing under this year, and did you choose it or inherit it?
Most people inherited it from whatever they did the first year. One line is enough.
More in this pillar as it's written.
— Shana
Sources link to the original publisher, never to a summary.