Is the extra work and cost worth it?
Two key things to consider are your household income and your potential to take investors.
Household income. If you or your partner have lot of employee income (called W-2 earnings), it’s worth doing some tax planning with your accountant or business manager. If you already make a lot of money, the profits from your business will be taxed at a high personal rate if you are a sole proprietor.
If you make over $82,000 as a single person or $165,000 as a household, your incremental business profits above these amounts will be taxed at 24% to 37%. You may be better off paying the 21% federal corporate tax rate on your profits.
If you operate at no profit or a loss, you can decide whether to limit your exposure to those losses by keeping them in the business, or applying them to reduce your personal taxes.
Investors. If you have partners or would like to take on investors, they may have an opinion about your tax structure. If you are planning on taking professional investors, they are likely to want all the revenue and tax liability to stay within the business.
Costs. An incorporated business has its own federal and state tax returns. You will most likely need to use an accountant. You may have to pay a base state tax no matter what - in California, it's $800 per year.
You'll need to keep more records about what you pay yourself, either as salary or owner's distribution, as well as all of your expenses. You may need to hire a bookkeeper.
A rule of thumb on when the tax benefits outweigh the additional costs in California is roughly between $80,000 and $100,000 of gross business revenue. It may be less in your state. This topic is a great way to start a conversation with your personal team!
A little bit of planning around your expected personal income and your potential for taking investors in the first 3 to 5 years of your business will go along way in helping you choose the right corporate structure.