I have Kiplinger's Small Business Attorney. This is what they have to say. My accountant advised me to incorporate and it has worked out for me. Hope this helps. Limited Liability Companies Background Every state has enacted laws permitting the formation of a limited liability company ("LLC") as an alternative to traditional corporations, general partnerships and limited partnerships. LLCs have become popular because they offer the flexibility in management and other matters like a general partnership, while providing the benefit of limited liability for the investing members, like a corporation. Unlike limited partnerships, LLC's protect all of the owners and all of them may participate in management. Unlike S corporations, LLC's do not restrict the number or type of owners. For these reasons, the LLC is sometimes preferred to these other popular entities used by small businesses. Basic Requirements Limited liability companies are formed and established much like a corporation. The founders must prepare and file the proper documents with the state, according to the state's limited liability company law. These laws normally provide that the LLC may have powers like a corporation. However some states restrict LLCs from certain activities, such as banking, insurance and professional services. LLC's have members, similar to a corporation's shareholders. These members must have a written agreement, much like a partnership agreement. Cost Unfortunately, the average cost to establish an LLC is much higher than the cost of simple incorporation. LLC documents are not standardized, and it is important to have a qualified attorney help establish an LLC. While the cost to set up a corporation can be as little as $100 plus filing fees, an LLC usually costs a minimum of $1500 plus filing fees, and is often much higher. Considerations The IRS has determined that an LLC meeting certain requirements may be taxed as a "pass through" entity like a partnership or S corporation. This means that the LLC's profits and losses flow through to the LLC members. Many of the restrictions placed on S corporations, such as limits as to the number of shareholders, do not exist for an LLC. LLCs also differ from regular corporations in other ways. LLC laws do not permit the LLC to have unlimited life. Most laws prohibit LLC's to a life not to exceed thirty years. Also, LLC members are subject to different rules with respect to transferring their membership interests, and withdrawing and distributing profits, as compared to a regular corporation's shareholders. One of the drawbacks to LLC's is the uncertainty of doing business outside the state when the LLC is formed. Because not all states have identical LLC laws, you may have difficulty qualifying your LLC in a "foreign" state. If not properly qualified, that state law may permit claimants to "pierce the corporate veil", thereby making individual members liable for LLC debts. This loss of limited liability protection poses a substantial risk. Consult with your attorney to determine if an LLC may be appropriate for a given business enterprise. For related information see: S Corporations Background An "S corporation" is a closely held corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code, instead of the rules of Subchapter C that generally govern taxation of corporations. S corporation election does not modify any of the laws and rules concerning liabilities or legal obligations of corporate directors, officers or shareholders. Other than the way in which S corporations and their shareholders are taxed, S corporations are subject to all of the issues and obligations, and have all the benefits and rights of, any other corporation. Avoid Double Taxation A corporation is considered to be a tax paying entity separate from its shareholders. Most corporations are taxed as C corporations. A C corporation must file returns and pay taxes on its income. When the corporation distributes some of its income to shareholders as dividends, the shareholders must pay income tax on the dividends. The income the shareholders receive is therefore taxed twice, once at the corporate level when the corporation receives it, and again at the shareholder level when the shareholders receive it. This "double taxation" is one of the drawbacks to C corporation status. On the other hand, S corporations are treated differently. They avoid "double taxation." If an eligible corporation and its shareholders elect to be taxed as an S corporation, the corporation is treated as "pass through" entity (very much like a partnership). All corporate income is "passed through" to the shareholders. The S corporation does not pay a corporate income tax. The income is taxed only at the shareholder level. Likewise, all losses, deductions and credits are passed through to the shareholders and must be included on the shareholders' tax returns in the same form that those items are received, paid or incurred by the corporation. Qualifying as an S Corporation To qualify as an S corporation, the corporation must be a "small business corporation" as defined in the Internal Revenue Code. To qualify as a small business corporation, there may be no more than 35 shareholders, there may be only one class of stock, and the corporation and the shareholders must properly and timely file an election with the Internal Revenue Service and meet other requirements. While the benefits of S corporation status are in many cases significant, to receive those benefits the corporation and the shareholders must comply with the Internal Revenue Code and related regulations, and keep and maintain appropriate books and records. Also, S corporation status may be beneficial to some shareholders but not all. Before making an S corporation election, consult with an attorney or accountant well versed in the S corporation requirements and benefits. Other business forms, in particular a limited partnership or a limited liability company, may provide comparable tax benefits without some of the disadvantages of a limited liability company.