I do agree that all small businesses, regardless of the number of owners, that would not benefit financially by incorporating should register their activity as an LLC to get the liability protection. It is relatively inexpensive to do so, and it can probably be done online by the business owner himself/herself without having to pay a lawyer. But I also believe that a one-person LLC should elect the “default” entity and file a Schedule C. It is my opinion that if you want to file as a corporation you should incorporate.
I believe it is bad advice to tell ALL taxpayers who have a Schedule C business to incorporate. There is no tax advice that applies to all businesses in all situations (except don’t cheat). The decision to incorporate a business requires careful review of all the specific facts and circumstances of the individual situation. And taxes are not the only consideration. In a majority of cases it is not financially beneficial, either in the short or long term, to incorporate.
The advice that one should incorporate solely for the purpose of avoiding an audit seems to me to be saying, “If you want to cheat on your taxes you can incorporate and the IRS will not audit you”. It is not good tax or financial advice.
I have said time and again that an IRS audit is not something that should be avoided at all costs. Tax returns should be prepared, and decisions about choosing a business entity should be made, in such a manner as to generate the absolute least amount of federal, state and local taxes (income and payroll) within the parameters of federal and state laws. If you will pay less taxes (income and payroll), fees and other costs by filing a Schedule C you should do so, honestly and ethically, and not worry about being audited.
If your return is prepared correctly, and you document all items of income and deduction properly upfront, then an audit is nothing more than an inconvenience.
It is very true that one consideration out of many in determining whether or not to incorporate is the fact that the audit profile of the business will be reduced, and more so in coming years. But it is only one – and a minor one at that. At most it is merely “icing on the cake”. Unless, of course, you are a crook.
If you are told that there is a substantially greater chance of being audited if you deduct your $10,000 gift to a qualified charity, which you did properly and have all requisite documentation, it would be bad advice to tell you not to deduct the $10,000. The deduction is genuine and you can prove it. Who cares if the IRS asks you to prove it?
I do agree that there are indeed times when it is “more better” financially to incorporate a one-person business, especially when excessive health insurance costs are involved. But certainly not in all cases.
The decision to incorporate is by no means a “no-brainer”. It involves a lot of brain work!