Do I Need to Set up an LLC, an S Corp, or Other Legal Entity?
Your legal entity is something you can grow into, not a requirement on day one. Many people begin as independent “sole proprietors”. As fractional work becomes more consistent and higher earning, setting up the right structure can provide meaningful benefits.
The correct answer will depend on your stage. Let’s explore your different options, and you can determine which is right for you.
Starting Without a Business Entity
If you are experimenting with fractional work or working with a single client, operating as a “sole proprietor” (i.e. no formal legal entity) is often sufficient. This keeps things simple while you decide whether fractional work is something you want to pursue long term.
At this stage, the priority is learning how to deliver value and find clients. Adding legal tax complexity too early will slow you down more than it will help you.
When an LLC is a Good Next Step
Once fractional work is providing noticeable income and feels intentional, forming an LLC often makes sense.
While an LLC is not required, it can help separate personal and business finances, provide basic liability protection and tax advantages, and create a more professional setup for working with clients. It is relatively inexpensive to set up an LLC and easy to maintain, which makes it a practical step once fractional work becomes a larger part of everyday life and once you notice business expenses start to occur more often.
When an S Corp Becomes Worth It
As income increases, an LLC with S Corp tax treatment is generally the most effective structure.
A common rule of thumb for when it is time to set up S Corp tax treatment is when you expect to earn $80,000 or more per year from your fractional work. At that level, the tax saving start to outweigh the added complexity.
The S Corp election is what unlocks most of the added tax benefits by allowing income to be split between salary and profit distributions. Profit distributions are taxed at a lower rate than salary which is why many fractionals prefer to have this setup. This does require payroll and ongoing compliance, which is why it works best once income is higher and more predictable.
Getting Support As You Scale
When you reach the point where an LLC plus S Corp makes sense, many fractionals work with services like Lettuce to handle setup, payroll, and compliance. The right support can make the process straightforward and reduce ongoing administrative work.
Lettuce is part of the Fractional Jobs Toolkit, and we recommend them to fractionals ready for S Corp status. They also have an LLC-only tier, which is super helpful for folks just getting started.
In Summary
While there is no single correct setup for every fractional professional, many prefer to open an LLC as the work becomes more consistent, and later move to an LLC with S Corp treatment when annual income surpasses the $80,000 mark. No entity is required to begin fractional work, but is rather a tool to support growth and tax savings over time.
Learn more about the tax benefits of fractional work in our Playbook here.
Who Wrote This Guide?
I’ve helped 100+ companies hire fractional execs and other fractional talent. I also spent a year as a Fractional Head of Product.
I intimately understand how fractional work works from both sides of the table. And this guide is meant to help everyone get up to speed on the fractional world, quickly.
What to read next
Want more?
Send fractional jobs,
playbooks, and more to
.svg)
.svg)
