Sole Prop vs. LLC vs. S-Corp for Trades Businesses (2026 Guide)

The question most trades owners ask wrong

"Should I form an LLC or an S-Corp?"

This question doesn't actually make sense, even though everybody asks it. Here's why:

LLC is a legal structure. It separates your business from your personal life.
S-Corp is a tax election. It's a choice your LLC (or corporation) can make about how it gets taxed.

So when somebody asks "LLC vs. S-Corp," what they actually mean is: "Should I be a regular LLC, or should my LLC elect to be taxed as an S-Corp?"

The four options, in plain English

Option 1: Sole proprietor (no LLC)

This is the default if you just start doing business under your own name. No paperwork, no fees, no separation between you and the business.

Pros: Zero setup cost. Simple as it gets.

Cons: Zero legal protection. Maximum tax burden — every dollar of profit hit with 15.3% SE tax. Harder to look professional to commercial customers and banks.

Verdict: Almost never the right answer for a real trades business. The cost of an LLC in Texas (~$300 for filing + the annual Franchise Tax filing, which is usually $0 due) is so low that there's no good reason not to upgrade.

Option 2: Single-member LLC, taxed as sole prop (default)

This is what you get when you form an LLC and don't elect anything else. The IRS calls it a "disregarded entity" — which sounds insulting but just means they tax you the same as a sole prop.

Pros: Legal liability protection. Simple taxes. Cheap to maintain.

Cons: Same 15.3% self-employment tax as a sole prop.

Verdict: The right starting point for almost every trades business.

Option 3: LLC with S-Corp election

This is the big tax-saver. You file Form 2553 with the IRS to elect S-Corp status. Now your business is taxed differently:

You become a W-2 employee of your own business
You pay yourself a reasonable salary through payroll
Profits above your salary come out as shareholder distributions — NOT subject to self-employment tax

That last bullet is the whole game.

Option 4: C-Corporation

Almost never the right answer for a small trades business. Double taxation — the corporation pays tax on profits, then you pay tax again when you take money out as a dividend. Skip unless there's a specific reason.

The math: when does S-Corp start saving you money?

The rule of thumb everyone repeats — "once you make $50K-ish" — is roughly right. Here's the real version with actual numbers.

Example: HVAC contractor making $120,000 net profit

As a sole prop / LLC: Self-employment tax: 15.3% × $120,000 ≈ $18,360

As an S-Corp paying $65,000 reasonable salary: Payroll taxes on salary: ~$9,945. Distributions of $55,000 → no SE tax. Savings: ~$8,400/year

Subtract costs of running payroll (~$500–$1,500/year) and an S-Corp tax return (~$650–$1,200), and you're still ahead by $5,000–$7,000 per year.

At $200,000 in profit, the same math typically saves $12,000–$15,000/year. At $300,000+, the savings are large enough that there's basically no scenario where staying a sole prop makes sense.

What's "reasonable compensation"?

The IRS requires that S-Corp owner-operators pay themselves a reasonable salary for the work they actually do. You can't pay yourself $20,000 and call the other $180,000 distributions. That's the kind of thing that triggers an audit and gets the election unwound retroactively.

The standard: What would you have to pay someone else to do the work you're doing?

For a typical owner-operator in DFW trades, reasonable comp usually lands between $50,000 and $95,000 depending on:

Your trade and specialty
Whether you're in the field swinging hammers vs. running the office
Hours worked
Your training, license, and experience
Comparable salaries from Bureau of Labor Statistics and industry surveys

A proper reasonable compensation analysis is part of what I do for every S-Corp client at Northbound — and it's the kind of documentation you want in the file in case the IRS ever asks.

Setting reasonable comp too low to dodge taxes is one of the fastest ways to get an S-Corp election revoked. Setting it appropriately documents your good faith and locks in the tax savings.

When NOT to elect S-Corp

S-Corp isn't right for everyone. Skip the election if:

Your net profit is under ~$50K. The savings won't beat the costs of running payroll and filing an extra return.
You're brand new and unproven. Wait until you have a year of real numbers. You can elect S-Corp later — even retroactively, in some cases.
You have multiple owners with very different ownership percentages. S-Corps require distributions to be proportional to ownership. Gets messy.
You're planning to raise outside capital from non-individual investors. S-Corps have shareholder restrictions.
Most of your income comes from passive sources (rental properties, etc.). S-Corp doesn't help with passive income.

Texas-specific considerations

Texas has no state income tax, so the S-Corp election only affects your federal tax bill. (In states with income tax, there are sometimes additional complications.)

Texas Franchise Tax applies to LLCs and corporations regardless of how you're taxed federally. Per the Texas Comptroller, the 2026 no-tax-due threshold is $2.65 million in annualized revenue — but even if you owe $0, you still have to file the Public Information Report by May 15 every year. Miss it and your entity can be administratively forfeited.

Full deadline guide: Every Texas Tax Deadline a Trades Business Owner Needs to Know

"Piercing the corporate veil" — the part most owners screw up

Forming an LLC or S-Corp doesn't automatically protect you. To keep that protection intact, you have to actually treat the business as separate. Courts can "pierce the corporate veil" and come after your personal assets if you:

Commingle business and personal funds
Pay personal expenses out of business accounts (gym membership, your kid's daycare, vacations)
Don't maintain separate bank accounts and credit cards
Fail to keep basic corporate records
Treat the business bank account like a personal piggy bank

The fix is simple: separate accounts, clean records, and pay yourself through proper channels (owner draws for LLCs, payroll + distributions for S-Corps).

How to actually make the change

If you decide to elect S-Corp status, here's the process:

File Form 2553 with the IRS. To take effect for the current year, this generally needs to be filed within 75 days of the start of the year (by mid-March). Late elections are possible but more complicated.
Set up payroll. Gusto or QuickBooks Payroll are the two I usually recommend. Run yourself a paycheck on a regular schedule.
Document reasonable compensation with a written analysis on file.
Open a separate business account if you haven't already.
Track distributions separately from payroll. Distributions are NOT a deductible business expense — they reduce your basis in the company.
File Form 1120-S each year by March 15 (or extend to September 15).

If you're planning to elect for next year and want to do it cleanly, the time to start prepping is October/November of the prior year.

What to do next

If you're a Texas trades business owner trying to figure this out, here's the order of operations:

If you don't have an LLC yet — get one. Use the Texas Secretary of State website or hire a registered agent service. Should cost under $400 all-in.
Run your numbers. What was your net profit last year? What's it on track to be this year?
If you're under ~$50K profit: stay an LLC taxed as sole prop. Revisit next year.
If you're at $60K+ and growing: the S-Corp conversation should be on your calendar this year. The longer you wait, the more money you're leaving on the table.

This is exactly what a discovery call with Northbound is built for. We'll look at your numbers, talk about what makes sense, and you'll walk away with a clear answer — even if it's "stay where you are for now." Book a free 30-minute call →

Sole Prop vs. LLC vs. S-Corp: A Trades Owner's Guide to Picking the Right Structure