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What's the difference between an LLC and a sole proprietorship?

If you’re working for yourself and haven’t filed anything with the state to create a business entity, you’re already a sole proprietorship. It’s the default. No paperwork, no formation cost, no annual state fees. You report your business income and expenses on Schedule C of your personal tax return and pay self-employment tax on the profit.

An LLC is a legal entity you create by filing articles of organization with the California Secretary of State. The main benefit is liability protection. If something goes wrong on a job and you get sued, the LLC creates a legal separation between your business assets and your personal assets. Your house, your personal savings, and your truck (if it’s titled personally) are harder to reach in a lawsuit. As a sole proprietor, there is no separation. Everything you own is fair game.

For anyone in the trades or construction, that liability protection matters. You’re working on other people’s property, using tools and equipment that can cause damage, and dealing with subcontractors and employees. Insurance covers a lot, but having the LLC as an additional layer of protection is worth considering.

On the tax side, a single-member LLC doesn’t change much by itself. The IRS treats it as a “disregarded entity,” which means you still file Schedule C just like a sole proprietor. The income flows to your personal return the same way. The LLC doesn’t automatically save you on taxes.

The tax savings people hear about usually come from electing S-corp status, which is a separate step. That’s worth exploring once your net profit is consistently high enough to justify it, but it adds complexity and payroll requirements. A CPA who works with trade businesses can help you figure out when that election actually makes sense for your situation rather than just following generic advice you found online.

The biggest drawback of an LLC in California is cost. The state charges a minimum $800 franchise tax every year regardless of whether you made any money. That hits hard if you’re just getting started or if your business is seasonal. A sole proprietorship has no equivalent fee.

There are also practical reasons to form an LLC. Some general contractors require subs to have an LLC before they’ll work with them. Lenders and suppliers may take you more seriously. And it keeps your business looking professional, which matters when you’re bidding larger jobs.

The bottom line is that a sole proprietorship is simpler and cheaper to maintain, while an LLC gives you liability protection and more flexibility as you grow. Most trade business owners benefit from forming an LLC once the business is generating steady revenue, but the timing depends on your specific numbers. If you’re not sure where you stand, getting tax strategy guidance before making the decision will save you from either paying the $800 too early or waiting too long and leaving yourself exposed.

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More Questions

How much should I set aside for taxes as a contractor?

Most contractors should set aside 25% to 30% of their net income for taxes. In California, the number leans closer to 30% once you factor in self-employment tax, federal income tax, and state income tax.

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What financial documents do I need to get a business loan?

Lenders typically want two to three years of tax returns, a current profit and loss statement, a balance sheet, bank statements, and a debt schedule. Having clean, up-to-date books makes the difference between a smooth application and a scramble.

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How do I report subcontractor payments to the IRS?

You report subcontractor payments using Form 1099-NEC for anyone you paid $600 or more during the year. The form is due to both the IRS and the subcontractor by January 31. Collect a W-9 from every sub before you pay them.

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How do I track income from multiple jobs at the same time?

Assign every invoice and expense to a specific job in your accounting software. QuickBooks Online's Projects feature or classes let you track income and costs per job so you can see profitability on each one.

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Should my contracting business be an LLC or S-corp?

LLC and S-corp aren't mutually exclusive. An LLC is a legal structure while S-corp is a tax election. The real question is whether your LLC should elect S-corp taxation, which depends on your net profit level.

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What's unique about accounting for a landscaping business?

Landscaping businesses deal with a mix of recurring maintenance revenue and one-time project work, seasonal cash flow swings, heavy equipment depreciation, and crew labor tracking. Each of these needs specific handling in your books.

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Long Beach CPA firm specializing in contractors, trades, and service businesses. Bookkeeping, tax preparation, IRS representation, and advisory services for businesses across the South Bay and Greater LA. Owned and operated by a CPA with over a decade of hands-on experience.

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