Single member limited liability companies (LLC) are ignored for federal tax purpose. Thus you will be taxed as a sole proprietor. Adding a limited liability company, however. will offer liability protection. This can be important. You have the simplicity of a sole proprietor but the liability protection of a corporation. If liability is an issue at all, and you don’t have sufficient tax reasons to incorporate, the limited liability company (LLC) is for you.
Since you are treated as a sole proprietor for federal tax purposes, all your income is subject to self employment tax. Self employment tax is 15.3% up to the wage base. The wage base is $102,000 for 2008 (it’s adjusted for inflation). After your net income reaches the wage base, you will pay self employment tax of 2.3% for all net business income that is above the wage base. Self employment tax can be more than your income tax. If your income is significant, you may want to reduce your self employment tax. This can be done with an S Corporation. See my article, Entity Choice (Saving Tax with S Corporations)