Should you have an LLC?
Why Small Businesses Benefit from Using an LLC Structure
Choosing the right business structure is one of the most important decisions a small business owner makes. Many entrepreneurs start out as sole proprietors and report income on Schedule C of their personal tax return. While this may seem simple, it may not always be the best choice.
For many small businesses, forming a Limited Liability Company (LLC) offers powerful advantages—both in terms of liability protection and tax flexibility.
Liability Protection: Shielding Your Personal Assets
One of the biggest reasons business owners move from a sole proprietorship to an LLC is personal liability protection.
Schedule C (Sole Proprietor): There is no separation between you and the business. If your business is sued or owes money, your personal assets (house, car, savings) are at risk.
LLC: Creates a legal barrier between your business and your personal assets. In most cases, only the business assets are at risk if something goes wrong.
This separation is essential as your business grows and takes on contracts, employees, or higher levels of financial risk.
Tax Advantages of an LLC vs. Schedule C
An LLC also offers more flexibility in how your business income is taxed.
Schedule C: All profits are reported as self-employment income. You’ll pay income tax + self-employment tax (Social Security and Medicare) on 100% of the profits.
LLC: By default, a single-member LLC is taxed the same as a Schedule C. However, an LLC can elect to be taxed as an S Corporation, which allows you to split income into reasonable salary (subject to self-employment tax) and distributions (not subject to self-employment tax). This can lead to significant tax savings.
For many profitable small businesses, this tax election is a game-changer.
Compliance Requirements: LLC vs. Schedule C
It’s true that an LLC comes with a little more paperwork than a sole proprietorship, but the compliance requirements are manageable:
Schedule C (Sole Proprietor):
Simply file your business income and expenses on your personal tax return (Form 1040 + Schedule C). Minimal formalities.LLC:
Must file formation documents with your state, pay a filing fee, and maintain your entity (annual reports or franchise taxes may apply depending on the state). An LLC must also maintain a separate bank account and keep personal and business finances clearly separate.
While this requires more attention, the protection and flexibility usually outweigh the added work.
Comparing Business Structures
Here’s a quick comparison of LLC vs. Schedule C vs. Corporation (Inc.):
Feature Schedule C (Sole Proprietor) LLC (Limited Liability Company) Corporation (Inc.) Liability Protection None – personal assets at risk Yes – separates personal and business assets Yes – strongest liability protection Taxation All profits taxed as self-employment income Default: same as Schedule C; Option to elect S-Corp taxation for savings C-Corp: profits taxed at corporate rate + dividends taxed again; S-Corp: pass-through with payroll requirements Compliance Simple – file Schedule C with Form 1040 Moderate – state filings, annual reports, separate bank account Higher – strict formalities (board meetings, minutes, bylaws) Ease of Setup Easiest – no state filing required Easy – state filing + fee required More complex – state incorporation + higher fees Best For Hobby businesses, freelancers with low risk Most small to mid-sized businesses seeking liability protection & tax flexibility Larger businesses seeking investors or planning to go public
Final Word
An LLC strikes the balance most small business owners need: liability protection, flexible tax treatment, and manageable compliance requirements. Compared to operating as a Schedule C business, an LLC can protect your personal assets and even reduce your overall tax bill with the right election.
👉 If you’re considering moving your business into an LLC, talk to a CPA first. The right structure depends on your income level, industry, and future growth plans. With proper planning, you can protect what you’ve built and keep more of what you earn.