Business Entity Setup for Online Businesses — LLC, Sole Prop, S-Corp

Sole Proprietorship — The Simplest Start

A sole proprietorship is the default structure if you start earning money without formally registering a business. There's no paperwork to file — you just report income on your personal tax return (Schedule C). The downside is unlimited personal liability: your personal assets (house, savings, car) are at risk if you're sued or default on debts. Best for: earnings under $10,000/year while you validate your business model. You can switch to an LLC later without penalty.

LLC — Asset Protection Without Complexity

A Limited Liability Company separates your personal and business assets. If your business is sued, creditors can only go after business assets, not your personal bank accounts or home. Forming an LLC costs $100-800 depending on your state (annual renewal fees also apply). LLCs have pass-through taxation — profits go to your personal tax return and you pay self-employment tax (15.3%) on the full amount. Best for: earnings between $10,000 and $60,000/year and any business with legal risk (affiliate sites, coaching, selling physical products).

S-Corp — Tax Savings at Higher Income

An S-Corp election (you must first form an LLC or corporation, then file Form 2553 with the IRS) lets you split your income into salary and distributions, potentially saving thousands on self-employment tax. The trade-off is more complexity: payroll processing, quarterly payroll tax filings, and stricter compliance requirements. The savings kick in around $60,000+ in net profit. At that level, you pay yourself a "reasonable salary" (typically 40-60% of profits) and take the rest as distributions not subject to self-employment tax. Running payroll costs $500-1,500/year through services like Gusto or ADP, so the math only works above $60K.

State Considerations

You can form an LLC in any state, not just your home state. Delaware and Wyoming offer strong asset protection laws and no state income tax on out-of-state earnings. However, forming in a different state means registering as a foreign entity in your home state, paying filing fees in both states. For most solo online businesses, forming in your home state is simpler and cheaper. Only consider Delaware or Wyoming if you expect significant legal risk or plan to raise outside investment.

Step-by-Step Setup

Step 1: Choose your entity type based on income. Step 2: Reserve your business name with your state's Secretary of State. Step 3: File Articles of Organization (for LLC) or register as a DBA (for sole prop). Step 4: Get an EIN from the IRS for free at IRS.gov (required for LLCs with employees or S-Corps; optional for single-member LLCs). Step 5: Open a separate business bank account. Step 6: Register for state taxes (sales tax permit if selling products). Services like LegalZoom and ZenBusiness handle filings for $0-399 plus state fees, or you can self-file directly through your state's website for the lowest cost.

FAQs

Do I need an LLC if I only make a few thousand dollars a year?

Not necessarily. Below $10,000 in revenue, the cost of forming and maintaining an LLC may not be worth it. However, if your business carries liability risk (coaching, consulting, or selling physical products), an LLC is worth considering at any income level for the personal asset protection.

Can I change from sole prop to LLC later?

Yes, you can switch at any time by forming an LLC and transferring your business assets and contracts. You can also change your tax election to S-Corp later. Many businesses start as sole props and upgrade as income grows.

How much does it cost to maintain an LLC?

State annual report fees range from $0-800. Some states (California, New York) also have minimum franchise taxes or publication requirements. Factor $100-500/year in most states for LLC maintenance, plus potential registered agent fees ($100-300/year) if you use a service.