Sole Proprietor and Single-Member LLC
The simplest business structure is the sole proprietorship — no separate legal entity, all business income flows to the owner's personal return on Schedule C, and all net income is subject to both income tax AND self-employment tax (15.3%). A single-member LLC (SMLLC) offers legal liability protection but is treated identically to a sole proprietorship for federal tax purposes by default (it's a 'disregarded entity'). Income flows to Schedule C, SE tax applies to all net income. The simplicity is appealing, but the full SE tax burden becomes significant at higher income levels. Example: $100,000 net business income as a sole proprietor: income tax (approximately $15,000 at single filer rates after deductions) + SE tax (approximately $14,130) = approximately $29,130 total federal tax. At $200,000: income tax ~$40,000 + SE tax ~$25,000 (note SS wage base cap helps here) = approximately $65,000 total. Every dollar of net income is subject to SE tax, making the marginal SE tax cost significant. Multi-member LLCs are taxed as partnerships by default — income flows to each partner's personal return via K-1 forms, with SE tax applying to active partners.