Do you earn income from a sideline business, such as consulting or writing? You might want to form a limited liability company (LLC) or a corporation for that activity. An LLC or a corporation offers limited liability; if you think that your sideline business might lead to lawsuits some day, this is a topic you should discuss with a local attorney. There may be some tax-saving opportunities, too.
You might set up an LLC for your sideline business and elect to have it taxed as a corporation. Any LLC can be treated like a corporation for tax purposes by filing IRS Form 8832 and checking the corporate tax treatment box on the form.
After making this election, profits kept in the LLC are taxed at the separate income tax rates that apply to corporations; the owners don’t pay personal income taxes on profits left in the company. (Unlike an LLC, a corporation pays its own taxes on all corporate profits left in the business.) Because the corporate income tax rates for the first $75,000 of corporate taxable income are lower than the individual income tax rates that apply to most LLC owners, this might save you and your co-owners money in overall taxes.
Another possibility is to create an LLC or an S corporation for your sideline activities and give away interests to low-bracket family members. If your teenaged children own 75 percent of this S corporation, for example, 75 percent of the earnings might be taxed at their lower tax brackets.
In addition, S corporation profits would not be subject to self-employment tax.
Setting up and properly running an LLC or an S corporation will cost some money and take some time. Whether such expense and effort will be worthwhile will depend on the amounts involved, the tax brackets of the parties concerned, and the intended use of funds received by parties other than yourself. If your sideline business brings in a substantial amount of annual income, it may pay off to discuss these strategies with your tax advisor.