While creating a corporation or an LLC sure seems business-like, there are some downsides you should consider. NYC doesn’t recognize the existence of S corporations, so you’re taxed at a C-Corp’s rate (about 8%), which negates any tax savings from avoiding self employment tax on your non salary distribution. S corporations, partnerships and non-solely owned LLC also require another tax return, further reducing your savings.
The primary reason to form one of these entities is if you’re worried about being sued, as it reduces liability. However, if your business doesn’t come with that kind of risk, here’s a worthwhile alternative to consider: set up a DBA (Doing Business As – about $90), get an EIN (Employer Identification Number – free!), and buy insurance if you’re still a little concerned about liability. DBAs still allow you to write and receive checks out as a company, without the tax hassle. If you have a partner, one can own the company, and have a good contract written up and split your profit any way you decide.