Key Takeaways

  • A sole proprietorship is the simplest business structure—ideal for single-owner startups, but offers no liability protection.
  • A corporation provides limited liability, continuity, and easier access to funding but involves more paperwork, costs, and compliance.
  • Sole proprietors report income and expenses on Schedule C of their personal tax returns, while corporations file Form 1120 (C Corp) or 1120-S (S Corp).
  • Corporations can raise capital through stock sales and continue indefinitely beyond the owner’s lifetime.
  • In California and similar states, corporations face additional filing and franchise tax obligations, but benefit from pass-through taxation if they elect S Corp status.
  • The right choice depends on factors like liability risk, tax goals, number of owners, and growth plans.

When comparing a single proprietorship vs. corporation, there are several important factors that you must consider, including your liability protections, tax requirements, and management options. 

Sole Proprietorship vs. LLC vs. Corporation

A corporation provides several advantages over other business structures, particularly partnerships and sole proprietorships. The primary advantage of a corporation is that the personal assets of shareholders are protected from company debts.

When you form a partnership or a sole proprietorship, you can be held personally liable for the debts of your business. If your company does not have enough assets to cover your debts, creditors can go after your personal property, including your home or bank account. When a corporation runs out of money, shareholder's personal assets usually can't be pursued to cover debts.

However, there are limited circumstances where an individual company shareholder is responsible for business debts. For instance, if a shareholder has guaranteed a debt personally, they may be held liable. It's also possible that the court may decide that ignoring corporate protections and holding shareholders liable for debts is in the best interest of justice. This practice is commonly referred to as piercing the corporate veil.

Circumstances where the corporate veil can be pierced include:

  • When corporate funds and personal funds are mixed
  • When the corporation does not hold shareholder meetings and has not appointed a director
  • When the corporation has minimal insurance or capitalization
  • When the corporation has violated state law or has failed to pay taxes

Another benefit of forming a corporation is that you can save a great deal of money on self-employment taxes. Sole-proprietorships must pay a 13.3% self-employment tax on the first $106,800 that they earn. With a corporation, these taxes only apply to salaries. Profits are exempt. This means that forming a corporation can help save thousands in taxes.

Corporations also differ from partnerships and sole proprietorships in that they can last indefinitely. This business structure can last beyond the death of its directors, officers, and shareholders. 

Unlike other business structures, corporations can raise capital fairly easily. For example, to raise capital, a corporation can:

  • Sell stock shares
  • Create new stock stops
  • Seek out investors

When choosing a corporation, you should be able to easily transfer ownership shares whenever you need. It's possible to sell ownership shares without interfering in the day to day operations of the business.

It is impossible to completely sell a partnership or sole proprietorship. To sell either of these entities, you must individually transfer permits, licenses, and assets. The new business owner must also apply for a new federal tax identification number and apply for their own business bank account.

Sole proprietorships can also be beneficial in several ways and provide some advantages that are not available with a corporation. For instance, it is incredibly simple to establish either a sole proprietorship or partnership. They are also much cheaper to form. While you will need to pay filing, formation, and state fees, your insurance costs will be much lower than they would be with a corporation.

Unlike corporations, there are very few formalities that apply to partnerships and sole proprietorships. Corporations, for instance, must file formation documents with their state. Other formalities that apply to corporations include:

  • The need for shareholder and director meetings
  • The need to record corporate minutes
  • Needing approval from the board of directors for business transactions

Failing to abide by these formalities may result in the loss of liability protections for the corporation's shareholders. Keeping up with corporate formalities can be extremely time consuming. When you form a general partnership or sole proprietorship, you do not need any organizing documents or operating procedures.

You also won't be liable for unemployment insurance when choosing a sole proprietorship. Corporate shareholder-employees must pay unemployment taxes based on their salary. As of right now the first $7,000 in wages is subject to a 6.2% unemployment tax. The maximum unemployment tax per employee is $434. You will not need to worry about paying for this tax when you choose a sole proprietorship instead of a corporation.

When you pay the unemployment tax required by your state, you can potentially receive a 5.4% offset credit. Effectively this reduces the federal unemployment tax to 0.8%. It also results in a $56 per year maximum tax per employee.

Advantages of a Sole Proprietorship

A sole proprietorship is the easiest and least expensive way to start a business. It requires minimal paperwork, and income is taxed once as part of your personal income. There’s no need to file separate corporate tax forms or hold annual meetings, making this structure especially appealing to freelancers, independent contractors, and small-scale entrepreneurs.

Key benefits include:

  • Simple setup and management: No separate business filings are needed with the Secretary of State in most cases.
  • Direct control: The owner has complete authority over all business decisions.
  • Tax simplicity: Profits and losses “pass through” directly to the owner’s tax return.
  • Low ongoing costs: Few state fees and no formal recordkeeping requirements.

However, this simplicity comes at a cost. You are personally liable for debts and lawsuits. Personal assets, including your home or savings, can be at risk if the business faces legal or financial trouble.

Advantages of Incorporating

Forming a corporation offers strong legal and financial benefits, particularly for businesses planning to grow or attract investors. A corporation is a separate legal entity, meaning owners (shareholders) are generally not personally liable for the company’s debts or legal obligations.

Main advantages include:

  • Limited liability protection: Shareholders’ personal assets are safeguarded from most business liabilities.
  • Perpetual existence: A corporation continues to exist even if ownership changes or a shareholder dies.
  • Funding flexibility: Corporations can issue stock, attract investors, and access venture capital.
  • Tax planning opportunities: Corporations can deduct benefits like health insurance and retirement contributions for employees.

Corporations also tend to be viewed as more credible and professional, which can strengthen relationships with lenders, suppliers, and customers.

Disadvantages of a Sole Proprietorship

The downside of operating as a sole proprietorship lies primarily in personal liability and limited growth potential.

  • Unlimited liability: The owner bears full personal responsibility for business debts or lawsuits.
  • Difficulty raising capital: Investors typically avoid sole proprietorships because they cannot issue shares.
  • No continuity: The business ends if the owner dies or retires.
  • Limited tax flexibility: Unlike corporations, sole proprietors cannot retain profits for future expansion or elect different tax treatments.

These drawbacks make this structure suitable only for low-risk, small-scale operations or early testing phases of a business.

Disadvantages of Incorporating

While corporations provide liability protection and potential tax advantages, they also carry greater administrative and financial burdens.

  • Formation costs: State filing fees, attorney services, and annual franchise taxes can be expensive.
  • Ongoing compliance: Corporations must hold annual meetings, record minutes, and file periodic reports.
  • Double taxation (for C Corps): Corporate profits are taxed once at the entity level and again on shareholder dividends.
  • Reduced privacy: Corporations must make certain business information publicly available.

Despite these costs, incorporation remains valuable for business owners seeking growth, credibility, and legal separation from personal assets.

Tax Differences Between Sole Proprietorships and Corporations

The tax implications are one of the biggest distinctions in the sole proprietorship vs corporation debate.

Sole Proprietorship Taxes:

  • All business income and losses are reported on the owner’s personal tax return (Schedule C).
  • The owner must pay self-employment taxes (Social Security and Medicare).
  • There’s no separation between personal and business income.

Corporate Taxes:

  • A C Corporation pays taxes on profits at the corporate level, and shareholders pay again on dividends (“double taxation”).
  • An S Corporation avoids double taxation by passing income through to shareholders, who report it on personal returns.
  • Corporations can also deduct expenses like salaries, benefits, and insurance, often leading to significant savings.

In states like California, corporations are subject to an annual minimum franchise tax and may face stricter reporting obligations than sole proprietorships.

Choosing the Right Structure for Your Business

The best choice between a sole proprietorship and corporation depends on your goals, risk tolerance, and business growth plans.

Consider a sole proprietorship if you:

  • Want to test your business idea with minimal cost and paperwork.
  • Have low risk of liability or lawsuits.
  • Prefer to maintain full control and simplicity.

Consider incorporating if you:

  • Expect to hire employees or attract investors.
  • Need liability protection for personal assets.
  • Want the flexibility to retain earnings and plan taxes strategically.
  • Operate in a higher-risk industry or one requiring credibility and continuity.

If you’re unsure which option aligns with your needs, you can find and consult an attorney through UpCounsel, where experienced lawyers can help you evaluate your goals and select the right structure for your business.

Frequently Asked Questions

  1. Is it better to be a sole proprietor or a corporation?
    It depends on your goals. A sole proprietorship offers simplicity and lower costs, while a corporation provides liability protection and growth potential.
  2. Can I convert my sole proprietorship into a corporation later?
    Yes. You can file incorporation documents with your state, obtain a new EIN, and transfer assets and contracts from your sole proprietorship to the new corporation.
  3. How much does it cost to incorporate?
    Costs vary by state, but typically include filing fees ($100–$800), registered agent fees, and annual report or franchise tax obligations.
  4. Do corporations pay more taxes than sole proprietors?
    Not always. While C Corps face double taxation, S Corps can pass income directly to shareholders, often reducing the total tax burden.
  5. Can a corporation have only one owner?
    Yes. A single-owner corporation, often called a single-shareholder corporation, is legal in all states and still provides liability protection.

If you need help choosing between a sole proprietorship vs. corporation, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.