What exactly does incorporating do?

[Adam Yunker]

Hey guys,

So this is an area I'm pretty confused on..

Let's say I started an online business and make $1,000/month. Now if I'm a sole proprietor (in other words, didn't incorporate) then I pay tax on the revenues right? In this example the $1,000? Even if I spend $500 on business expenses I still get taxed on the $1,000?


Now I heard if I incorporate as an LLC I'll only get taxed on my profit, in this case the $500. Is that right?


But I mostly was wondering if I am a single member LLC I hear you get taxed as a sole proprietor.. Does that mean I can have an LLC and still pay tax on the full $1,000? In that case I'd need to ask to have my LLC treated as an S Corp, right?

Any replies are appreciated!
Thanks!

 

[Rob Whisonant]

You may want to spend a hundred or so with a tax accountant. If you are a sole proprietor you still only pay tax on your PROFIT. Not income.

The main benefit of incorporating is reduction in personal liability.

 

[SethTurin]

Depending on your state, I believe there are also additional benefits and costs to incorporating. You can change your own payment structure in certain places, and allow yourself to not be taxed as heavily in exchange for some other things.

I am not an accountant, clearly, but it seems worth paying $300 once to get the info direct from one!

 

[SARubin]

I can only speak from my own experience here. I've started more than one LLC over the years, and I live in New Hampshire, so your state could be different. But...

As far as my taxes went, there was no significant difference between my filing as a sole proprietor, or an LLC. I still got to deduct all business expenses, pre-tax.

The main benefit (and the reason I started going with LLC's) was keeping the businesses assets separate from my personal assets. So if my company ever got sued (which thankfully never happened), as an LLC no one could go after my house, or personal bank account.

It only cost me $100 a year for filing fees to keep the LLC active, and in good standing. And it was well worth it for the peace of mind.

Also, (and this is only speculation on my part) I think having "LLC" attached to my business name, might have given me more credibility in some peoples eyes?