Should I incorporate a LLC or S Corp?

I provide business consulting in California and am wondering what's the best business structure I should go for to limit my tax liability and protect my assets? Does one structure give me more in being able to deduct business expenses? Or should I keep just as self employed as myself under no structure?

Thanks all for answering so quickly. To provide more details, I'm planning on expanding my consulting to include more services and therefore will likely hire sub-contractors/vendors.

Well, I am not a CPA...but I am an Enrolled Agent (certified by the IRS). I don't have a general rule. Each situation is different.
The first thing I have to say is that most CPA's aren't tax experts...they are auditors. I do know some CPA's that are very good at taxation though...they specialize in this area.
Now, to answer your question. It depends on what type of consulting you do and the exposure of your assets.
It is not true that a S-Corp pays less tax than an LLC. Sometimes they do sometimes they don't. But, a S-Corp does offer a bit more flexibilty. Yet, it creates more paper work and more regulation.
If you are making a profit with a S-Corp you are required to take a salary. So, you pay half of the SS tax and the S-Corp pays half (it is still the same amount as an LLC). But, there is a problem with the S-Corp. How do you legally get the money out of the corporation to your personal account without paying tax on it again? You will not have this problem with a single owner LLC.
It is a very complex question that you are asking. However, I want to ask you some questions. Would a professional insurance policy accomplish the same means? What are the odds of you being sued? Your a consultant...you give them advice...you don't make the final decision. What liability do you have?

Do you really want to make your tax situation more complex, and/or expensive, than it needs to be? Something to think about...it never makes any sense spending a dollar just to save pennies in taxation.

My advice (without knowing a lot more) would be to re-think your situation. Is there really a need to change it now?


Hope this helps.

As a CPA, my general advice to someone that is starting a service business is to form as an S-corporation. S-corporations typically provide the same amount of legal protection as an LLC (but, of course, you should contact an attorney for more information about your specific situation), and generally result in lower taxes. This is because, while they both have the same formula to calculate taxable income, the income you earn as an S-corporation is not subject to self-employment taxes (except the salary you pay yourself), while the income from an LLC usually is.

If you plan on having any complicated ownership structures to your business (more than 100 owners, owners other than individuals, such as other businesses), then an S-corp won't really work for you. But otherwise, it's generally the better option.

Hope this helps.

I'd go for the LLC. Since you are the only person in the business there is not need to do an S Corp unless you plan to get bigger and have employees in the future.
Talk to your State Commerce Commission.

I would advise that you set up a LLC, but have it as a flow through entity, which means a LLC treated as a S Corp. With this structure, you can save money on FICA taxes, but I advise this structure for this reason.

With a S-Corp, you have to meet corporate statues such as holding annual meetings. If you dont follow corporate statue, the corporation charter can be pierced and you will be held personally responsibile. THE llc structure does not hve rules likes.

Do consult a attorney, because he/she will give you better advise by probing you with more questions

All of them depend on just exactly what assets you are trying to protect and how much they are worth. More depends on exactly what you will be doing to your filing status for taxes, and what that will do to change your tax liability. You will have to speak to a tax preparer, preferably one with their EA certificate, from the IRS that says they are an expert. Some of the answers may need a lawyer too, but they cost money, while the people at http://www.hrrblock.com/ will start you out for free. Be sure to make an appointment well in advance (this is their busy season) and bring all your financial information as well as your returns for the last few years. You may not need a lawyer when an EA gets done with your tax position.

The primary benefit of an LLC or Corp (S-Corp or C-Corp) is that they tend to insulate your personal assets from business liability claims. That is NOT a blanket protection however as any physician who has ever been sued for malpractice will tell you. You can ALWAYS be sued personally and your personal assets are exposed if the suit is successful.

Generally there are not any significant tax benefits to forming an LLC or Corp, particularly at the federal level. States often tax LLCs as Corps and many states have minimum state franchise fees that must be paid regardless of profit or loss within the LLC or Corp so forming one can often increase your tax bill. In most cases it will increase your costs somewhat as you must deal with the costs of organizing the LLC or Corp and any additional tax returns and other reporting requirements.

Unless you're in a high-risk business, a good general liability insurance policy can provide better protection at a lower cost. And it will also protect your business assets as well as your personal assets. Isolating your personal assets with an LLC or Corp is fine but without insurnace your business could go up in smoke if you were successfully sued and only insurance can protect your business from that.

In the end, you need to consult with an attorney and a CPA or EA to evaluate your business plan and adivse you accordingly. Be suspicious of anyone who pushes one form or ownership over another without fully examining your business plan. Some have an ulterior motive going forward such as future fees for services that you may not need. Question any recommendations in detail and have them show you up front your expected costs and beneifts before you proceed.

The vast majority of small businesses are served very will with a simple Sole Proprietorship or Partnership combined with a good general liability insurance policy. Demand proof of clear advantage for any other type of legal organization compared to either of those as the Gold Standard.

Just a couple of thoughts to add to what others have posted.

While it is true that profits reported on SCH E from you S corp aren't subject to social security taxes; you must still pay yourself a reasonable salary. So if others in your profession are making $100k per year and you pay yourself a salary less than that in an audit you are begging for penalties and interest. (On employment taxes the penalty is %100 of what you should have paid).
The key benefit of either form of business you are talking about is liability protection. This is useless unless you are talking about liability your employees cause. You can still be sued successfully for mistakes you make.
Make sure you are not needlessly complicating your tax situation where you could produce the same benefits with insurance as a sole proprietor.
Consult an Attorney and an Enrolled Agent, take their advise after they have explained why they think which form of business is best.