Unless you expect to make a lot of money or expect to take on a substantial amount of liability, you’re far better off just treating yourself as a sole proprietorship and keeping your business income and expenses on a Schedule C. Even without a corporate entity, you can deduct legitimate business expenses.

How much is a lot of money? For an LLC, certainly no less than $50,000. Unless you plan on making over $100,000 or so, there is no tax benefit to becoming a subchapter S or C corporation. (An exception might be if you have large medical expenses.)

Keep in mind that in most cases a single-member LLC is a viewed by the IRS as a disregarded entity. It doesn’t have its own Federal Employee Identification Number (FEIN), it exists under your own social security number (SSN). Thus, as far as the IRS cares, the LLC does not exist. You’re creating the LLC strictly for liability protection, not tax reasons.

Many people think that a corporate entity is a force field, impervious to all attacks. In reality, it is more of a flu shot — sometimes it works, sometimes it doesn’t. Mostly, it just makes you think you won’t get the flu. Washing your hands regularly is a far more effective a weapon against the flu than a flu shot. Good, honest business practices are a far more effective weapon against liability than an LLC.

Also, consider what your monetary liability might be when considering if you need protection. For writers, editors and photographers, unless you act in a horribly reckless or malicious fashion, you liability is limited to what you were paid. You’re not performing brain surgery after all.

If you have multiple, unrelated businesses, it may be worth your while to grow a collection of LLCs. On the other hand, if you only have one source of income and that income flows into and out of an LLC, that LLC may not provide you any practical protection at all.

Let’s say your LLC makes $50,000 and the LLC immediately writes you a check for $50,000. You took $50k out of the company. If you get sued, the LLC may not have the $50k in the bank but you still may be on the hook to that amount.

An LLC or corporation will cost you money each and every year just to exist. The state filing fees are the least expensive part of the equation. Your accountant is going to charge you more to file your tax return. Your attorney is going to bill you to review all your corporate documents. You may need to upgrade from the home version of Quicken to the business version. You’re going to want to open a separate bank account. You’re going to get piles of junk mail to both your name and your business name. There are overhead costs — both soft and hard — associated with becoming a corporation. Before you go down that road, make sure the tax savings or liability protection are worth the headaches.

Quite frankly, if I had the choice of spending $1,000 a year to have a single-member LLC with no W2 employees or paying $1,000 for a umbrella insurance policy, I’d far rather have the latter.

The folks at Tax Almanac have a nice discussion on entity selection (http://www.taxalmanac.com/index.php/Choice_of_Entity) as well as many disussions on the subject. If folks will post their questions to We Were Print, I’ll make sure someone from TaxAlmanac stops by to answer them.

In the meantime, here are my entity rules of thumb:

* If you can’t come up with three real (not urban legend or water cooler) reasons to have a corporate entity, you don’t need one.
* If you have no W2 employees, don’t form a corporation.
* If your only product is your personal service, don’t form a corporation.
* If you’re not making much ($50,000 LLC; $100,000 S/C), don’t form a corporation.
* If you are holding real estate, get an LLC per property.
* If all profits are flushed to the owner, get an LLC.
* If you have high medical expenses and no employees, you’re probably not an LLC.
* If you don’t expect to make money three out of the next five years, you have a hobby, not a business.
* Don’t take tax advice from your business attorney.
* Don’t take legal advice from your CPA.

—CorpTaxHelp